Verizon Communications Inc.VZ

Morningstar Rating

Stock Research and Analysis

by Michael Hodel, CFA

Verizon's wireless unit has quickly integrated the Alltel acquisition and continued to post solid growth and profitability, despite AT&T's T gains on its exclusive deal to carry the iPhone. The fixed-line business, by contrast, hasn't performed Read more

Bulls Say

Among the Bells, Verizon has the best strategy for the long-term future of its fixed-line business. Its next-generation network, which enables unparalleled data speeds and upgradability, reaches more than 14 million customers today--45% of the firm's footprint--and should reach 18 million by the end of 2010.

Verizon Wireless is the clear leader in the industry, with nearly 90 million customers and coverage of more than 95% of the U.S. population. The firm continues to add millions of new subscribers each year, and its customers are the most loyal in the business, despite the fact that it can't offer Apple's AAPL iPhone.

Verizon Wireless generates tons of cash, which it is using to quickly pay down debt taken on to fund the Alltel acquisition. Once the FiOS upgrade is complete, the fixed-line business should also generate lots of cash. As a result, Verizon could be in a position to either sharply increase its dividend or buy back shares in a couple years. Read more

Bears Say

Customers are increasingly replacing their traditional phone lines with wireless and data services or switching to competing carriers. Verizon's ability to extract high margins through its phone network is declining. Around two thirds of the fixed-line segment's revenue is still tied to the phone business.

Verizon is spending a tremendous amount of money to upgrade its fixed-line network and connect customers to that network. Earning a decent return on this investment, given declining demand for phone service and stiff competition for Internet access customers, will be difficult.

Verizon Wireless is performing well, but the cost of maintaining network quality and keeping out competition is high. The firm has spent more than $12 billion to buy wireless spectrum at auction over the past couple years, primarily adding capacity in areas it already serves.

Verizon Wireless will need all that spectrum, if not more, and will likely need to spend heavily to upgrade its networks as it offers customers more devices that encourage heavy data usage. Otherwise the firm runs the risk of having the same network issues that have hurt AT&T.

Getting wireless customers to pay for the network capacity they consume becomes increasingly challenging as wireless firms persist in marketing $30-per-month "unlimited" data plans. Read more

Strategy

Verizon has sold and spun off assets to strengthen its balance sheet and focus on the telecom business. The firm has spent the most aggressively of the regional Bells in upgrading its fixed-line networks. Read more

Management

We think Verizon's stewardship is fair on the whole and relative to peers'. The board has taken steps during the last couple years to address some of our concerns about compensation, most recently adopting a bonus plan, effective starting in 2009, that Read more

Profile

Verizon is the incumbent local phone company serving about 30% of the U.S. population. The firm owns a long-haul network that reaches cities around the globe. Verizon Wireless, Read more

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Weekly Market Wrap: 1/29/2010
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