Images

People complain about the incumbent telephone and Internet providers, but Verizon (NYSE:VZ) kept doing what it does in the third quarter -- and that's not a bad outcome for long-term shareholders. As the following table illustrates, the nation's largest wireless provider came in right in line with Wall Street's revenue expectation for the quarter, but narrowly missed on earnings per share. Still, 14% year-on-year EPS growth is nothing to sneeze at -- particularly since it is the company's 10th instance of double-digit growth in reported (and adjusted) earnings per share in the past 11 quarters.

 

Actual Year-on-year % growth

Analysts' consensus estimate

Revenue

$31.59 billion

+4%

$31.58 billion

Earnings per share

$0.89

+14%

$0.90

Source: Company documents, Thomson Reuters I/B/E/S.

Tablets rule
Tablets were instrumental in contributing to subscriber growth: Verizon added 1.5 million postpaid retail connections (the most lucrative category), of which 1.1 million were tablets. The churn rate in retail postpaid accounts edged higher to 1% in the quarter from 0.97% in the prior-year period. That suggests competition from Verizon's smaller competitors, T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S), has not been ineffective, but the increase is well within tolerable limits.

Earlier this month, Verizon announced a program that will double the data allowance for premium shared plans; the announcement came just days after Sprint and AT&T (NYSE:T) introduced similar plans. Nonetheless, in a research note published prior to the earnings release, Credit Suisse remarked that "Verizon has been able to maintain strong subscriber trends while remaining less aggressive on pricing than peers."

Along with churn, operating costs in the wireless segment also increased, but profitability remains excellent, with a 32% operating profit margin driving a whopping companywide operating cash flow of $23.2 billion.

Verizon did not change its guidance for the fourth quarter, with the company continuing to target 4% revenue growth for the full year, along with an increase in its earnings before interest, taxes, depreciation, and amortization margin, or EBITDA (a measure of cash flow) and $17 billion in capital expenditures (the top end of the capex range it had previously given.)

Verizon: A decent long-term proposition
Verizon is underperforming the broad market so far today (the shares were up less than half a percent at 11:35 a.m. EDT.) That might be due to the miss, but long-term investors won't linger on that as there is little to be gained in trying to decipher the situation. What is important is that, despite some aggressive competition, Verizon remains well positioned in its sector (fairly dominant, in fact) and, as a result, generates significant free cash flow. Furthermore, the franchise is stable and, at 12.4 times the forward earnings-per-share estimate according to Capital IQ, the shares look reasonably priced. In any market, those are attractive attributes; all the more so in the current environment.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.