Bill Baruch, president and founder of Blue Line Futures, reviews and previews the euro, Japanese yen...
Ring up Verizon and Vodaphone
06/02/2006 12:00 am EST
"Strong numbers coupled with vehemently negative investor sentiment is a combination that value investors dream of in a stock," says Roger Conrad. "And no sector offers it more compellingly today than communications." Here, he looks at two related telecom plays.
"Few stocks regularly receive as much trashing in the popular financial press as Verizon Communications (VZ NYSE). This month, the wags lambasted the company for everything from share performance and lofty executive salaries to the current administration’s calls on data collection. Other headlines focused on a 7.1% drop in its bottom line for the first quarter and the 6.9% year-over-year drop in basic local phone line connections.
"Those who dig a little deeper, however,
will see a company rapidly and successfully transitioning from the Baby Bell of
old to a diversified communications giant generating mountains of cash from a
range of high-growth businesses. Front and center again was the performance of
55%-owned Verizon Wireless, which added 1.7 million customers while reducing
customer churn and increasing operating margins.
"Verizon is rumored to be negotiating to buy out its 45% partner Vodafone, a move that would further tilt the business mix toward fast-growing operations. Meanwhile, it also reported strong progress integrating the operations of recently acquired MCI Communications, completing a third of slated job cuts while continuing to sign on major business customers.
"On the wireline front, Verizon continues to rapidly build its state-of-the-art fiber optic network to provide a range of broadband services, including television. Broadband connections rose 47.1 percent during the last 12 months; and for the second quarter in a row, growth outpaced the loss of local connections as the company’s offerings continue to exceed expectations.
"Verizon’s Voice over Internet Protocol service has proven enormously popular and competitive. Fully 17% of homes passed by its budding fiber optic network so far have signed onto its services within a year. And despite the hefty construction costs, earnings and debt levels have been only marginally affected. That’s a powerful testament to the huge cash flows Verizon generates—more than $6 billion in the first quarter alone.
"As is the case for any other high-profile company in transition, Verizon’s critics aren’t going away until its success is painfully obvious. That means it’s going to continue to take patience to own this stock, though its nearly 5% yield certainly helps, and the shares have turned up so far in 2006. Verizon is a buy up to 38.
"Meanwhile, we are also bullish on Vodafone (VOD NYSE) and have featured the stock as our latest Growth Highlight in our Utility Forecaster. "Vodafone’s market value of around $140 billion is nowhere close to the sum of its parts. Buying Vodafone in a joint bid would give all three players valuable assets at a fraction of the cost of picking them up piecemeal.
"The 45% stake of Verizon Wireless owned by Vodafone has an estimated stand-alone value of $50 billion, though it accounts for just one-eighth of the customer base. The money-losing Japanese operation sold in March for $14.6 billion. At this point, Vodafone is (at least publicly) planning to stay independent.
"The company is reorganizing into
three units—Europe, new technology, and emerging markets—to focus on the
particular needs of each piece of its empire. The European division is allegedly
considering investing in fixed lines to enable it to bundle services to better
compete with rivals.
"No matter which way things break, it should be only a matter of time before Vodafone commands a higher share price. Coupled with the generous regular dividend and a special payout of about $1.78 per American Depositary Receipt from the Japan sale, that could easily add up to a 2006 return of 25 percent or more. Vodafone is a buy up to 25."
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