Verizon: "Throwing Down the Gauntlet"

04/10/2017 2:50 am EST

Focus: UTILITIES

Roger Conrad

Founder and Chief Editor, Capitalist Times

Verizon Communications (VZ) recently threw down the gauntlet by offering an unlimited data plan that should steal customers from competitors and reduce its churn rate. This move will likely compress profit margins across the US wireless industry, asserts Roger Conrad, editor of Conrad's Utility Investor.

The telecom giant’s profitability will also feel the squeeze, but the company still generates more than enough free cash flow to fund an unrivaled $16.8 billion to $17.5 billion worth of capital expenditures, disburse a generous dividend and pay down debt.

This capital budget is more than three times that of T-Mobile US (TMUS) this year and more than seven times the capital expenditures planned by Sprint Corp. (S). And these also-rans likely will take on even more debt to fund these investments.

Verizon Communications’ capital cushion and superior network quality mean that the company can outlast T-Mobile US and Sprint in a price war.

And the company continues to press ahead with the rollout of its 5-G network, a system that will provide a quantum leap in speed for data-intensive applications. This year, Verizon Communications will test its 5-G capabilities in 11 US cities as a replacement for home internet.

The company also stands to benefit from a favorable regulatory environment, with the Federal Communications Commission’s new chairman reiterating his opposition to net-neutrality rules and any actions that would inhibit network investment.

Verizon Communications continues to ready itself for an opportunity that eventually could dwarf the consumer wireless market: machine-to-machine communications, or the internet of things (IOT).

The company recently introduced Hum, a monthly service that monitors your vehicle’s health, tracks stolen vehicles and offers roadside and emergency assistance.

In the fourth quarter, Verizon Communications’ IOT revenue grew 21 percent from year-ago levels on an organic basis and 60 percent when you factor in acquisitions.

Although the $243 million in IOT revenue that the company generated last year is a drop in the bucket, this business should grow rapidly as industries and consumers leverage the power of machine-to-machine communications to drive efficiency and innovation.

Skeptics continue to question whether Verizon’ acquisition of Yahoo! (YHOO) will live up to management’s guidance, despite a rejiggered deal that includes a $350 million discount.

However, Verizon Communications’ stock hasn’t priced in any expectations for this transaction; any uplift in internet advertising will be a bonus.

Trading at less than a quarter of T-Mobile US’ inflated price-to-earnings ratio, Verizon Communications rates a buy up to $52 per share.

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