First Quarter Flashback
US wireless kingpin Verizon (VZ) produced a mixed bag in the first quarter. Adjusted earnings per share of 56 cents came in line with the Zacks Consensus Estimate while net income plummeted 75% year-over-year. Profit was hit by a $962 million one-time charge associated with the recent federal health care reform, which eliminated certain tax benefits related to retired employees.
On a positive note, Big Red reported a 1.2% annualized growth in revenues, driven by the contributions from Alltel Corp acquired in early 2009 and healthy gains across strategic growth areas such as wireless and FiOS footprint (Internet and video).
Wireless service revenues were buoyed by strong subscriber accretion and sustained demand for data services. Verizon posted healthy growth in data ARPU (average revenue per user) and decline in churn. Strong adoption of integrated devices continues to boost data revenues. The dark side in wireless was the decelerating contract customer growth (due to the maturing US wireless market) to which the Street reacted negatively and shares fell.
On the wireline side, revenues and margins remained under pressure due to the money-losing fixed voice business, as well as declines across global wholesale and enterprise operations.
We have discussed the quarterly results at length here: Verizon Net Tanks on Hefty Charges
Agreement – Estimate Revisions
The overall trend in estimate revisions for 2010 is inclined towards the negative side following tepid first quarter results. Out of a total of 32 analysts covering the stock, 23 have chopped their estimates over the past month while just 2 analysts have made positive revisions. Likewise, 20 analysts (out of a total of 30) have cut their forecasts for 2011 over the past month with 4 raising their estimates.
This strong negative sentiment has been fueled by the wireline headwinds (concerns over margins) and the dilutive impact of pension and benefit charges, and the expenses associated with the impending spin-off of specific wireline assets. Moreover, the recent slowdown in postpaid net additions, which mirrors a general trend in the industry, also contributed to the gloomy opinion.
The negative estimates revisions, which indicate weak performances moving forward, not only exert a meaningful impact on the Zacks Rank, but also reflect the potential for significant downward pressure on the stock.
Magnitude – Consensus Estimate Trend
Downward estimate revisions accompanied by a sheer directional agreement have led to a decline in annual forecasts for Verizon. Estimates for 2010 and 2011 have gone down by 4 cents and 7 cents, respectively, over the past 30 days.
However, the magnitude of revisions has plateaued over the last week. The current Zacks Consensus Estimate for 2010 is $2.28, reflecting a 5.21% year-over-year decline.
Verizon Stays in the Neutral Zone
Verizon’s ongoing efforts to extend the nationwide coverage of its 3G network remain encouraging. Moreover, the carrier is gearing up for the launch of its 4G Long-Term Evolution (LTE) network in fourth-quarter 2010 in up to 30 markets.
This will give Verizon a head start over its archrival AT&T (T), which lags with 4G LTE network launch planned in 2011. A major portion of capital expenditures for 2010 has been directed at LTE network build-outs, as the carrier has scaled back its FiOS deployments.
Prospects in wireless will also be boosted by an array of next-generation devices. Verizon launched Motorola’s (MOT) Droid smartphone in late 2009 to take on the iPhone. The carrier has expanded its Android smartphone range with the recently launched HTC Droid Incredible.
Moreover, Verizon has started selling Microsoft’s (MSFT) Kin phones and targets to unveil a 4G smartphone by mid-2011. Verizon may also sell iPhones, as AT&T is likely to lose its marketing exclusivity on the iconic device in 2010.
To boost its wireline business, Verizon is replacing its copper line-based networks with expensive fiber-optic deployments in key markets. The company is selling its local wireline assets in 13 states to Frontier Communications (FTR) to focus on more densely populated markets as well as building its fiber-to-the-home (FTTH) business.
Moving forward, we expect Verizon’s business prospects to be driven by the synergies from the Alltel acquisition and increased market penetration of its 3G and FiOS network footprints. Moreover, the above-average dividend yield will continue to offer downside support, and cost-cutting may produce margin improvements. However, we remain cautious about the persistent access line losses and the recent slowdown in postpaid subscriber growth.
Also, high promotional and layoff/restructuring expenses may drag earnings and margin in the upcoming quarters. This is reflected in our Neutral recommendation on the stock, which is supported by a Zacks #3 Rank (Hold).
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “VZ”
Read the full analyst report on “T”
Read the full analyst report on “FTR”
Read the full analyst report on “MOT”
Read the full analyst report on “MSFT”
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