The Henry Fund
Henry B. Tippie School of Management
Katie Carlson [catherine-m-carlson@uiowa.edu]
November 10, 2014
Verizon Communications, Inc. (VZ)
Buy
Stock Rating
Telecommunication Services
Investment Thesis
Verizon Communications is a diversified telecommunications provider that is
the largest telecom provider in the U.S. We believe they are the strongest
player in the US telecom market and are recommending a BUY for their stock.
Drivers of Thesis
•
Strong Player in Telecom. Verizon Communications is well-positioned against its
competitors in regards to financial metrics and customer additions. They have the
lowest customer churn of all major telecommunication’s competitors and
continue to report consistent earnings year over year.
•
Cloud Computing. Global cloud computing revenue is expected to increase
another 32% into 2016 and Verizon’s Cloud platform is well positioned to capture
a portion of this revenue from their enterprise customers8. Enterprise customers
are increasingly needing cloud computing technologies to handle large amounts
of data and become less dependent on slower, physical servers. With Verizon’s
brand name and fast 4G technologies, we believe they will be able to capture a
portion of this revenue.
•
Solar Energy Investments. Verizon has been making significant investments in
solar energy and are track to generate power for internal consumption. Not only
are these efforts positive for the environment, but they have the potential to
reduce or maintain their operating expenses at a consistent level, potentially
maximizing their net profits.
Risks to Thesis
•
Availability of Spectrum. The availability of spectrum is crucial to
telecommunication company’s survival and the spectrum capacities are being used
up at a faster rate than the supply of the spectrum. Spectrum licenses are heavily
regulated by the FCC and many television companies and governments have excess
capacity of this spectrum that needs to be auctioned off. If this does not happen at
a fast enough rate, this could pose a threat to all of the telecommunications
providers, including Verizon.
•
High Competition & Government Regulation. The telecommunications industry
has a lot of major competitors and the market for new subscribers is becoming
increasingly saturated; this is turn is putting pricing pressures between many of the
major providers to gain customers and minimize churn. Additionally, with the high
level of government regulation, any changes in new regulations could potentially
limit acquisitions and/or increase costs and reduce margins.
Target Price
Henry Fund DCF
Henry Fund DDM
Relative Multiple
Price Data
Current Price
52wk Range
Consensus 1yr Target
Key Statistics
Market Cap (B)
Shares Outstanding (M)
Institutional Ownership
Five Year Beta
Dividend Yield
Est. 5yr Growth
Price/Earnings (TTM)
Price/Earnings (FY1)
Price/Sales (TTM)
Price/Book (mrq)
Profitability
Operating Margin
Profit Margin
Return on Assets (TTM)
Return on Equity (TTM)
VZ
$53-55
$54.58
$59.71
$54.73
$50.49
$45.45 – 53.66
$53.34
$208.6
4,150
64.2%
0.03
4.40%
8.0%
14.4
13.1
1.67
12.58
27.05%
13.54%
8.40%
40.69%
Industry
Sector
600
609.4
400
331.4
200
Earnings Estimates
Year
EPS
growth
2011
$2.31
17.55%
2012
$2.49
7.73%
2013
$2.48
-0.45%
175.2
2014E
$3.87
56.0%
2015E
$3.39
-12.4%
2016E
$3.80
12.0%
12 Month Performance
VZ
15%
5%
0%
-5%
-10%
D
J
F
M
A
M
J
40.7 28.6 14.2
P/E
ROE
0
D/E
Company Description
S&P 500
10%
N
14.4 12.7 26.1
J
A
S
O
Verizon Communications is a diversified
telecommunications company founded in 1983
and located in New York, NY that provides
consumers,
businesses
and
government
organizations with communication, information
and entertainment products and services. They
operate in two reportable segments: wireless and
wireline. They currently have the largest 4G LTE
network of any telecommunications provider in
the United States with the biggest network
coverage area serving over 97 million customers
nationwide.
Important disclosures appear on the last page of this report.
EXECUTIVE SUMMARY
Verizon
Communications
is
a
diversified
telecommunications company that serves over 97 million
customers globally. They operate in two reportable
segments, wireless and wireline, and serve consumers,
businesses, and government organizations nationwide.
Their coverage area is the biggest of any of the US
telecommunications companies and they have the largest
market share in wireless and the second largest market
share in wireline communications.
We believe that they are the strongest player in the
telecommunications industry as they report solid earnings
year over year and pay out the biggest dividend per share
of any of their competitors. Although we do not believe
that the telecommunications industry is going to
experience significant growth over the next decade or so,
we believe that Verizon Communications is the best
positioned company to capture the benefits and dividends
of all of the telecommunications providers. For these
reasons we are recommending a BUY for Verizon
Communications stock with a target price range of $53-55.
Verizon Wireless is a leader in wireless communication
services in the United States. Their wireless network is
available to 97% of the U.S. population with the largest
fourth-generation (4G) Long-Term Evolution (LTE)
technology and third-generation (3G) Evolution-Data
Optimized (EV-DO) networks of any provider.
Prior to 2014, Verizon Communications owned a
controlling 55 percent interest in Verizon Wireless with
Vodafone owning the remaining 45 percent. In February
2014, Verizon Communications completed the purchase of
the 45% stake in Verizon Wireless from Vodafone for
approximately $130 billion, making it the third largest
corporate deal ever1. The deal was financed with cash,
$6.6 billion of debt financing and issuance of 1.27 billion
shares of stock to Vodafone shareholders9.
COMPANY DESCRIPTION
Operating Segments
Source: verizonwireless.com
32.6%
67.4%
Service revenues consist both pre-paid and post-paid
wireless revenues and represented 85.2% of their wireless
revenues in 2013. They estimated that 94% of their retail
connections, totaling 102.8 million, were post-paid
customers directly served by Verizon Wireless. Their
prepaid customers represent the remaining 6% of
connections, and include several connection plans that are
tailored to the needs of their customers.
Wireless
Wireline
Source: 2013 10-K Annual Report
Wireless
Verizon Communications wireless segment operates
under the brand name of Verizon Wireless and
represented 67.4 percent of their revenues at fiscal yearend 2013. The segment is further broken into two subsegments, service revenue and equipment and other,
making up 85.2 percent and 14.8 percent of revenues,
respectively.
In February 2014, they introduced their More Everything
plan, which replaced their Share Everything plan, which in
turn provided more value to their customers through
better pricing and options. These connection plans
feature unlimited voice minutes, unlimited domestic and
international texting plans, video and picture messaging,
mobile Hotspots, cloud storage and data allowance plans
which can be shared between several devices1. In 2013,
the Share Everything plan represented 46% of their retail
postpaid plans and by 3rd quarter 2014, the More
Page 2
Everything plans represented 57% of their post-paid
accounts2.
Their service revenue segment also includes other wireless
services such as internet access on all smartphones,
notebook computers, tablets, as well as JetPacks that
provide a mobile Wi-Fi connection. Additionally, their
customers have access to over a million applications and
services that are developed and distributed by third
parties such as Google Play, Apple ITunes, Microsoft and
Blackberry1. We have forecasted their service revenues to
grow organically around 4-5% per year throughout our
forecast period as we believe that Verizon will remain a
strong player within the wireless industry.
Verizon’s equipment and other segment of their wireless
revenues consist of the sale of smartphones, tablets and
other internet devices, and basic phones and represented
14.8% of their wireless revenues in 2013. They offer a
wide variety of smartphones, tablets, and other devices
purchased through a number of manufacturers that
support several operating platforms such as Apple,
Google, Windows and Blackberry. In 2013 they also
launched the Ellipsis 7 tablet, which is exclusively available
to Verizon Wireless. All of their wireless devices contain
chipsets, which is the “intelligence” of the wireless device,
manufactured by Qualcomm Incorporated1. We have
forecasted their equipment and other revenue to continue
to grow substantially around 9-10% per year through 2015
as new smartphones like the IPhone 6 and Galaxy S6
become released and more affordable. Following 2015,
we forecast growth around 5-6% per year with the
assumption that smartphone manufacturers will continue
to come out with newer versions.
Verizon Wireless’ 4G LTE and 3G EV-DO networks are the
largest of any provider in the United States, covering all of
the 100 most populous US metropolitan areas. In January
2014, it was estimated that their 4G LTE network was
available to 305 million Americans, including rural areas
served by their LTE in Rural America program. Their LTE
Rural America program is a program that was developed
to provide rural America with 4G LTE network access. As
of 2013, they have 20 committed program participants
(smaller wireless providers) that have the potential to
provide coverage to over 3 million Americans. Verizon has
plans to continue to expand and upgrade their network to
increase capacity and identify opportunities to
strategically acquire wireless operations and spectrum
licenses1. We have forecasted their overall wireline
revenues to grow 6.7 percent in 2014, followed by 4-5%
growth in revenues throughout 2018. We believe that
they will be able to continue to expand their customer
base at an organic growth rate due to competitive pricing
and expansion and upgrades of their networks. We also
believe that they will be able to grow their equipment
revenues through the continued adoption of wireless
devices such as smartphones and tablets.
Wireless Segments
14.8%
Service Revenue
Equipment & Other
85.2%
Source: 2013 10-K Annual Report
Wireline
Verizon Communications wireline segment provides voice,
data and video communications services to consumers in
the United States, as well as carriers, businesses and
government customers both in the United States and in
over 150 countries around the world. Their products and
services include broadband video and data, corporate
networking solutions, data center and cloud services,
security and managed network services, and local and long
distance voice services. In 2013, this segment represented
32.6% of their total revenues, which are divided into subsegments such as Mass Markets, Global Enterprise, Global
Wholesale, and other1.
Verizon’s Mass Markets segment includes operations that
provide customers with broadband services and local
exchange and long distance services to residential and
small business subscribers. This sub-segment represented
44.2% of wireline revenues in 2013. Their broadband
services include high-speed internet, FiOS internet and
FiOS Video services. Their FiOS Internet products,
including FiOS Quantum, provide customers with highspeed internet and download capabilities, and it was
estimated that 45% of their FiOS internet subscribers
subscribed to FiOS Quantum in 2013. Their FiOS Video
service is available to over 15 million homes in the United
Page 3
States, and includes differentiating content features that
they believe gives them an advantage to competitor’s
products1. As they continue to invest in expanding their
FiOS network to become available to more Americans, we
believe that their FiOS products and services is one of the
greatest opportunities for growth in their wireline
segment. We have forecasted their Mass Markets revenue
to grow around 3-4% per year throughout our forecast
period. We believe that there will be adoption of their
FiOS services, however, with the high amount of
competition in that market we do not believe that this
segment will grow no faster than 3-4% per year.
Verizon’s Global Enterprise segment offers medium and
large businesses networking products and solutions and
advanced communications services.
This segment
represented 37.5% of their total wireline revenues in 2013.
Their networking products and solutions provides these
businesses with Private IP services that allow them to
communicate over a private, secure network in more than
120 countries using Ethernet and Verizon Wireless’ 4G LTE
networks.
Their advanced communication services
includes IP communications, infrastructure and cloud
services, machine-to-machine (M2M) services and security
services. Their infrastructure and cloud services include
Infrastructure as a Service (IaaS) that provides customers
with data center, computing, data storage, application
management, and enterprise-class cloud services. It also
includes their M2M technology, which is a platform that
they are leveraging in several markets that permits
customers to connect and monitor equipment in fields like
automotive, transportation, energy, health monitoring,
education and insurance industries. This technology is
enabled by their 4G LTE network and they have developed
several strategic partnerships with companies in these
industries. We believe this is another area of growth for
Verizon in their wireline segment as they continue to
advance this technology and form other partnerships.
Lastly, their security services provide solutions that help
companies monitor and secure their networks and data1.
We have forecasted their Global Enterprise revenues to
decline slightly or remain fairly flat. We do not believe that
Verizon has enough of a competitive advantage in this
market over other software providers to gain a large
portion of customers in this market.
Verizon’s Global Wholesale segment provides services
such as data, voice, local dial tone and broadband
connectivity to other local and long distance carriers.
Global Wholesale represented 17.1% of their wireline
revenues in 2013 and a majority of this revenue was
generated through a few large telecommunications
companies, most of which are competitors to Verizon.
Verizon’s other segment of their wireline consists of local
exchange and long distance services that are derived from
former MCI mass market customers and represent just
over 1% of their total wireline revenues in 20131. We have
forecasted revenues in their overall wireline segment to
remain fairly flat, declining approximately 6% per year
throughout 2016 and then 10% in 2017 and 18% by 2018.
Although the use of wireline communications services are
declining, we believe the declining revenue in wireline
phone communications will be offset by slight growth in
their Mass Market and Global Enterprise sub-segments,
through the FiOS internet service expansion and M2M
service adoption.
Wireline Segments
1.2%
Mass Markets
17.1%
44.2%
Global Enterprise
Global Wholesale
37.5%
Other
Source: 2013 10-K Annual Report
Company Analysis
As stated in the company description, Verizon’s wireless
segment provides voice, data and video communications
products and services.
They operate in a highly
competitive environment globally with many other major
wireless communications providers and have developed
several strategic initiatives to remain competitive. The
majority of their revenue is generated by their post-paid
retail customers, and they must provide them with an
efficient, high-quality network in order to minimize churn
of their retail subscribers. Their network technology runs
on 4G LTE and 3G EV-DO platforms, and they are making
significant investments to continue to upgrade their 3G
networks to the higher data performance 4G network, as
data usage on mobile devices continues to increase. These
wireless services are operated on spectrum, which is the
radio frequency that wireless signals travel over. They
have several spectrum licenses on many of the bands that
Page 4
cover nearly all of the population of the United States.
However, these spectrum licenses are highly regulated
and controlled by the Federal Communications
Commission (FCC), and there are limited number of
spectrum licenses and frequencies available to all of the
wireless operators. In 2013, Verizon entered into several
spectrum transactions with various companies, including
competitors like T-Mobile, which have expanded their
coverage network. However, with the increasing demand
of data bandwidth through the use of mobile devices,
spectrums are being used at their capacity and it will be
required that Verizon continue to enter into agreements
and acquire licenses to remain competitive. In midNovember 2014, the FCC is expected to conduct an auction
for AWS-3 spectrum, with Verizon being one of the major
bidders along with AT&T and T-Mobile1.
There are several key growth areas within their wireless
segment as the mobile industry expands. Mobile video
content is expected to account for a majority of internet
traffic by 2018, and Verizon has made investments to
enhance their 4G LTE technologies to handle this growth.
They have developed a LTE Multicast service, which will
allow customers to access live streaming video content
with essentially no buffering, regardless of the number of
devices using this service. They also have tried to
capitalize on the trend of using mobile devices for financial
transactions, and have develop ISIS Mobile Wallet, a joint
venture with AT&T and T-Mobile that enables customers
to organize all of their payment cards through an
application on their mobile device. Lastly, they operate
innovation centers in Waltham, Massachusetts and San
Francisco, CA that serve as centers that work with their
strategic partners in varying industries to assist in develop
and implementing products, services, applications and
solutions1.
Verizon’s wireline segment provides customers with
broadband video and data, corporate networking
solutions, data center and cloud services, security and
managed network services, and local and long distance
voice services. It is expected that broadband usage will
continue to grow significantly over the next decade and
Verizon’s FiOS network and solutions provide them with
an opportunity to capitalize on this trend. They have also
introduced an enterprise-grade cloud platform, Verizon
Cloud Compute and Cloud Storage, which gives their
customers the ability to use cloud services while
maintaining control and performance. This cloud platform
can also be used by M2M customers that will allow them
to store, process, and analyze large amounts of data on a
real-time basis1.
Verizon’s marketing and distribution strategy for all of
their segments are based around promoting their brand,
leveraging their distribution network, and promoting their
products and services to all types of customers. They
market through television, print, radio, outdoor signage,
internet, and point-of-sale media promotions to grow
their customer base. They use both direct and indirect
distribution channels to do so. Their direct channels
include company operated stores and a telemarketing
sales force. In November 2013, they opened their first
Verizon Destination store in the Mall of America which is
meant to show customers how they can become
connected in all aspects of their lives. Their indirect
channels include retail locations via agents, internet
marketing, large-named retailers such as Best Buy, WalMart and Target, and some pre-paid only vendors such as
Dollar General and various other drug store chains. They
have also partnered with other service providers in which
Verizon’s products and services are sold jointly within a
bundled package or on a standalone basis1.
RECENT DEVELOPMENTS
Third-Quarter 2014 Earnings
Verizon Communications reported their third-quarter
earnings on October 21, 2014 and they slightly missed EPS
earnings expectations by $0.01. They reported an EPS of
$0.89, a 15.6% year over year increase of from Q3 2013
earnings, bringing them up to a year to date EPS of $2.65.
However, they believe their year to date EPS would be
$0.07 higher if the Vodafone-Verizon transaction was
completed at the beginning of the fiscal year instead of in
February 2014. They had strong growth in postpaid device
activations, totaling 11.7 million activations, and their
retail postpaid net adds totaled 1.5 million, an increase of
63.5% from 2013. Their year to date postpaid net adds
total 3.5 million, which is approximately 1 million more
than in 2013. They also had a strong quarter in wireline,
addition 162,000 internet and 114,000 video net
subscriber additions in the quarter. Overall, their growth
from second quarter was up around 1 percent. They also
announced a 3.8 percent increase in their dividends, bring
the dividend per share payout $2.20 for 2014. They
continue to increase their capex spending and they believe
that total capex spending for 2014 will be around $17
billion2. We believe they will have a strong fourth quarter,
Page 5
partially attributed to the holiday season spending, and
project their wireless revenues to increase 2.2% and their
wireline revenues to increase almost 1 percent, bringing
their overall revenue growth to around 2 percent for 2014.
We believe this growth will mostly be in their wireless
segment, due to increased customer additions and
equipment (mobile device) spending due to the holiday
season.
in exabytes per month
Mobile Data Usage
Acquisition of Verizon Wireless
INDUSTRY TRENDS
Mobile Broadband and Video
Wireless telecommunications providers have greatly
benefited in the increasing use of mobile devices over the
last several years. This trend is expected to continue as
more functions of daily life move towards digital uses.
Overall revenue in wireless communications is expected to
reach $268.5 billion by 2019, mostly driven by increased
use of data on mobile devices. The perception of the need
for cell phones to have internet capabilities is increasing,
and these perceptions along with increasing mobile
applications are expected alone to drive industry growth
2.8 percent per year, over the next 5 years. However, this
growth has the potential to be stunted if the wireless
spectrum licenses become less available. Per the chart
below, this growth in data usage (per Exabyte per month)
is expected to exponentially grow throughout 2018.
15
10
5
0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Statista
All of the major telecommunications providers have
struggled to keep up with this growing demand and been
making significant investments in their network capacities
to meet the growth of this demand. Major industry
players, for example T-Mobile and Sprint, have attempted
to merge together to grow their networks but have these
mergers have been crippled by strict FCC regulations.
However, the industry remains well-positioned to handle
this growth by upgrading their 3G networks to faster, more
reliable 4G LTE networks. The market for new subscriber
additions is also beginning to become increasingly
saturated and companies are facing pricing pressures and
reductions in margins because of this4. We believe that
Verizon will remain a main competitor in this landscape,
however, they will not experience much more than organic
growth rates due to this high competition, FCC regulation,
and pricing pressures.
Mobile Internet Connections
3000
2500
in millions
In February 2014, Verizon Communications acquired
Vodafone’s 45% stake in Verizon Wireless for $130 billion,
giving Verizon Communications complete control over
Verizon Wireless. The transaction was financed mainly
through cash, $6.6 billion of debt, and issuance of over 1.2
billion shares to shareholders of Vodafone. We have
incorporated this transaction into our model by decreasing
shares outstanding and increasing debt. This transaction
is expected to increase Verizon’s EPS by over 10 percent
and provide them with other financial flexibilities and
innovations they previously did not have due to Vodafone
owning a large stake in the company3. We believe this
acquisition has and will bring continued profits globally for
Verizon Communications, as well as gaining a greater US
market share as a telecommunications provider.
20
2000
1500
1000
500
0
2009
Source: Statista
Page 6
2010
2011
2012
2013
2014
2015
The availability of spectrum for telecommunications
companies is becoming increasingly smaller as data usage
increases and takes up more spectrum capacity, and are a
huge barrier to entry for the telecommunications industry.
The wireless industry’s performance to handle this
projected increase in data usage will largely depend on the
availability of this spectrum to the major providers.
Currently, spectrum is used and licensed to television,
radio, telecommunications, and governments in the form
of Megahertz bands. This spectrum licensing is solely
controlled by the FCC and therefore they can say who gets
how much. It is believed that many government agencies
and television providers that are now using satellite
services to provide TV have unused capacity in their
spectrums, and telecommunications providers are
wanting them to auction off this spectrum. This has been
a large source of competition between telecom providers
and will continue to be unless the spectrum starts
becoming more available to them4. However, many of the
large telecommunications providers have formed
agreements with each other to use each other’s spectrum
where there are surpluses and shortages, but these
agreements also have to be approved by the FCC before
they can be made. The FCC has announced an AWS-3
spectrum auction to take place in November 2014, and
Congress has also adopted legislation to reallocate and
auction spectrums by 20221. The main concern with these
legislations and auctions will be if they will be carried out
in time to meet the growing demand for data.
Machine-to-Machine (M2M) Connectivity
A recent report by Vodafone showed the machine-tomachine industry to grow significantly over the next
several years in the Americas. They predict that the
adoption within the last year has increased more than 80%
globally and that more than half of companies in the
Americas will adopt this technology by 2016. Many
companies are finding advantages in this technology such
as greater productivity and competitive advantages
through connecting machines to each other through 4G
technologies.
Automotive, consumer electronics,
healthcare, and energy and utilities are among the fastest
adopters of this technology, with nearly 30% adoption
rates globally. These remote maintenance capabilities
bring greater customer service, security, and productivity
to these company’s products and this is mainly what is
driving the adoption rates5. Verizon is starting to capitalize
on these trends by offering these services within their
Global Enterprise segment and we have forecasted slight
growth within this segment as they attempt to become a
major player in this industry.
Machine-to-Machine Connectivity
250
200
in billions
Spectrum Licenses
150
100
50
0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: Statista
MARKETS AND COMPETITION
Wireless
Verizon operates in an extremely competitive
environment with other large telecommunications
providers in the US and several providers globally. Their
main competitors in the industry are AT&T, T-Mobile, and
Sprint, all of which make up 93% of industry revenue and
are all majority-owned US companies. Verizon Wireless
has the largest share of the market at 35.9%, followed by
AT&T with 30.6% of the market, Sprint with 14% of the
market, and T-Mobile (a subsidiary of Deutsche Telekom
AG) with 12.2% of the market. These major players
compete on several factors including but not limited to
network reliability, capacity, and coverage, pricing,
customer service, product and service development, sales
and distribution, and capital resources.
Wireless Market Share
12.2%
14.0%
35.9%
Verizon Wireless
AT&T
30.6%
Sprint
T-Mobile
Source: IBIS World Wireless Telecommunications Report
Page 7
Verizon is one of the strongest competitors within the
telecommunications industry both financially and through
market share. They have acquired several small and
medium sized companies over the last 5 years which has
helped them to remain a strong player. However, they are
becoming increasingly dependent on their wireless
products and services and have begun to make
investments in more of their wireline offerings such as
M2M and FiOS products. They also were one of the first
companies to introduce plans, such as the More
Everything plan (previously Share Everything) that has
provided customers with increased options including data
and video, which has helped them remain competitive.
Second to Verizon is AT&T, which is also a very strong
player in the market. They offer very similar products and
services to customers that Verizon does and they are
probably Verizon’s largest competitor in the industry.
network, due to these spectrum transfers, which could
potentially pose a threat to their survival as a major
competitor in the industry4. We believe that they also do
not pose a major threat to Verizon’s revenues.
They gained traction in the prepaid wireless segment by
acquiring Leap Wireless International this year, which has
given them the potential to gain an additional 5 million
customers in an already heavily saturated market.
However, in spring 2014, AT&T announced they were
merging with DirecTV, a satellite TV provider, which will
integrate their wireless and wireline services with
DirecTV’s pay-tv business. This merger has already gained
overwhelming approval from its shareholders and the
Justice Department, and is awaiting final approval from
the FCC. We expect this merger to close sometime in
spring 2015. Sprint is the third largest competitor in the
industry, however has not been a very strong player over
the last several years. Softbank, a Chinese company,
acquired an 80% stake in Sprint in 2013, in hopes to help
them rebound from their negative financial position. They
have been operating at a loss over the last five years due
to high debt and large write-downs, mainly from the 2006
Sprint/Nextel merger, and large capital expenditures.
They have also experienced high customer dissatisfaction
with network coverage and capacity, of which they are
investing heavily in their networks to alleviate these
dropped calls. We do not believe that Sprint poses a major
threat to Verizon’s operations. T-Mobile, a subsidiary of
Deutsche Telekom AG, is the fourth largest player in the
industry. T-Mobile has had historical advantages, such as
being the first wireless provider of Google Android phones,
a major competitor for IPhones, however they have
struggled to retain subscribers through various spectrum
license transfers with their major competition. They are
also behind the game with upgrading their network to a 4G
Wireline Market Share
Wireline
Verizon also operates in an extremely competitive
environment for their wireline operations. Their main
competitors include AT&T and CenturyLink, as well as
many smaller competitors. The three biggest companies
in wireline, AT&T, Verizon and CenturyLink make up 85.3%
of industry revenue. AT&T has the largest market share
with 47.6%, followed by Verizon with 31.9% and
CenturyLink with 5.8%. These major competitors compete
on several factors including customer service, network
reliability, pricing, and product differentiation.
AT&T
5.8%
14.7%
Verizon
Communications
47.6%
31.9%
CenturyLink
Other
Source: IBIS World Wired Telecommunications Report5
Although AT&T has the majority of the market in wireline,
we believe that Verizon is the stronger player within the
wireline industry. Verizon has over 30 million wired
landline customers, and the total segment makes up over
30% of their total revenues. They also have invested over
20 billion in their FiOS fiber optic network over the last 5
years in order to capture the increasing demand for
wireline broadband connections.
subscribers in millions
Worldwide Broadband Connections
1000
800
600
400
200
0
2010
Source: Statista
Page 8
2011
2012
2013
2014
2015
However, we still expect their overall wireline revenues to
decline approximately 1% per year over the next 5 years or
so, due to the decreasing use of wireline services in
households. AT&T currently has 12 million retail consumer
access lines, 10 million retail business access lines, and 2
million wholesale access lines, of which their wireline
services makes up 46% of their total revenues. They also
have made significant investments in expanding their fiber
optic cable networks, however they are different from
Verizon in that they extend the fiber cables to
neighborhoods, but they are still using copper wiring for
the “last mile” connections. This is negative for them as
the copper wire connection speeds are much slower than
fiber optic connection speeds and the copper eventually
will have to be replaced. Additionally, Google Fiber is
becoming an increasing threat to major fiber optic
network providers as their network speed is up to 100
times faster than traditional broadband speeds and they
plan to expand to 10 more major cities all over the US
within the next several years10.
The company has also experienced declines in their
wireline revenues over the last 5 years, especially in 2009
due to the disconnection of many landlines, and we
believe that they will continue to experience slight
declines in these revenues due to the industry trend of
moving away from wireline services. The third largest
player in the wireline industry is CenturyLink, and their
wireline access line customers are heavily concentrated in
the western United States. They also have over 55 data
centers throughout North America, Europe, and Asia.
CenturyLink has significantly increased their size over the
last several years through various acquisitions, however
they are still only the third largest player in this industry.
They also have strategic partnerships with both Verizon
and DirecTV which allow them to offer digital television
and wireless services. Their wireline revenues are
expected to decline as well. Overall, we believe that
Verizon is the best positioned in the wireline industry in
comparison to their competitors, as they hold a large
majority of the market share and seem to have the most
up to date fiber optic cable layout. We do not believe that
any of the other players in the industry pose a major threat
to Verizon’s revenues in this segment5.
Peer Comparisons
Name
Mkt
Value (B)
Price
209.4
180.4
0.02
VERIZON
COMM. Inc.
AT&T Inc.
Sprint, Inc.
T-Mobile
(Deutsche
Telekom AG)
CenturyLink
Average
EPS
EPS
Debt/
(ttm) (FY1) P/E '13 P/E '14 Equity
Profit
Margin
$50.45
$34.79
$ 5.18
2.84
2.50
NM
3.87 17.76x 13.04x
2.57 13.92x 13.54x
-0.43 N/A -12.047
230.9
76.2
125.1
9.54%
14.17%
-8.50%
0.02
$28.45
0.05
0.22 569.00x 129.32x
157.5
0.14%
0.02
$41.63
2.76
2.04
2.63
2.32
117.4
145.49
-1.32%
5.63%
15.08x 15.83x
153.94 42.93
Source: FactSet
As you can see from the chart above, Verizon
Communications is well-positioned against its competitors
in terms of financial metrics. We have left Sprint
Corporation out of the averages as they have a negative
EPS for 2013 and will have an estimated negative EPS for
2014, making them an outlier. Verizon Communication is
trading at an EPS that is higher than the average of some
of their major competitors, including AT&T, T-Mobile, and
Sprint Corp. Their P/E ratios are strong in comparison to
industry averages, showing that their stock is pretty fairly
valued in the market. Their profit margin is nearly 10% for
2013, and we have forecasted their profit margin to
remain around 10-11% throughout our forecast period;
this profit margin is lower than AT&T’s, but this is most
likely due to adjustments from the February 2014
acquisition of Verizon Wireless. However, their debt to
equity ratio is well above the industry average, and much
higher than most of their peers, making this a risk to the
investment. Overall, we believe that Verizon is the
strongest player within the telecommunications industry.
ECONOMIC OUTLOOK
Interest Rates
Interest rates are a very important economic driver for the
telecommunications industry as most telecommunications
providers are highly leveraged and this debt is driven by
lending rates. Significant changes in lending rates will have
a large impact on telecom companies as they use financing
to acquire other companies and upgrade and expand their
wireless networks to keep up with increasing data
bandwidth demands. We believe that interest rates will
remain low and stable for our 6 month forecast period,
followed by rates drifting upwards and 10 year yields rising
to 3.50% within the next 2 years. These increases in the
yields will drive banks to raise their lending rates and
therefore put increased pressure on telecommunication
companies’ debt levels on their balance sheets. This could
have a significant negative effect on Verizon’s balance
Page 9
sheet as we have forecasted their long term debt levels to
increase consistently throughout 2018 as they continue to
acquire smaller telecommunications providers and finance
the expansion of their network capacities and coverage
areas.
•
Cloud computing adoption and revenue is expected to
substantially increase over the next decade or so due
to the demands for large data and more efficient data
analytics and storage. Verizon’s Cloud platform is
well-positioned to compete against many of the other
large platforms in the industry and we believe they can
potentially capture a portion of this revenue with their
brand name, reputation, and high-speed 4G networks.
•
Verizon invested over $100 million in 2013 and over
$40 million into solar energy to increase their solar
capacity. These investments and new capacity have
given Verizon the most solar-generating capacity of
any US telecommunications provider. We believe this
is positive for the company as not only it is
environmentally friendly, it has the potential to reduce
some of their operating costs. We did not forecast
significant reductions in their operating costs,
however we also did not forecast them to increase
significantly because of these investments7.
Disposable Income
Higher levels of disposable income encourage customers
to purchase products such as mobile devices and tablets,
and therefore an increase or decrease in consumer’s
disposable income could have a potential impact on profits
in the industry. We have predicted that consumer
confidence, which attributes to driving disposable
spending, will remain positive over the next 6 months, and
potentially drop to neutral over our longer-term 2 year
forecast. The economy has been in a stage of recovery
over the last several years and consumer confidence and
spending has continued to increase. We do not believe
that this will change enough to make a significant impact
on Verizon’s revenues.
Unemployment
INVESTMENT NEGATIVES
Unemployment is another key driver for this industry as it
typically determines discretionary spending habits.
Unemployment reach a post-recession low of 5.9% in
August 2014, and we believe that unemployment will
remain around 6% for both our short and longer term
forecast periods. Due to this, we do not believe slight
changes in unemployment will have a significant impact on
Verizon’s revenues over our forecast period.
•
The availability of spectrum is crucial to
telecommunication company’s survival and the
spectrum capacities are being used up at a faster rate
than the supply of the spectrum. Spectrum licenses
are heavily regulated by the FCC and many television
companies and governments have excess capacity of
this spectrum that needs to be auctioned off. If this
does not happen at a fast enough rate, this could pose
a threat to all of the telecommunications providers,
including Verizon.
•
The telecommunications industry has a lot of major
competitors and the market for new subscribers is
becoming increasingly saturated; this is turn is putting
pricing pressures between many of the major
providers to gain customers and minimize churn.
Additionally, with the high level of government
regulation, any changes in new regulations could
potentially limit acquisitions and/or increase costs and
reduce margins.
INVESTMENT POSITIVES
•
We believe that Verizon Communications is the
strongest player in the telecommunication industry.
They have the lowest churn of all of the major
competitors and report increase in earnings year over
year. AT&T poses the biggest threat to them however
we believe that AT&T is not as well positioned due to
the number of fiber optic build-outs they have to
complete, a lower dividend per share ($1.84 versus
$2.20), and the uncertainty of the upcoming AT&T and
DirecTV merger. Verizon has also been ranked by
Fortune Magazine as the number 1 telecom provider
and has won awards by JD Power & Association for
their FiOS network. We believe that Verizon is
currently
the
best
investment
for
the
telecommunications sector.
VALUATION
•
Page 10
We forecasted Verizon’s wireless revenues to remain
fairly organic around 4-5% throughout our forecast
•
•
•
•
•
period to 2018. We believe that along with the 100%
ownership in Verizon Wireless, and since they are such
a strong player in the wireless industry, that they will
be able to sustain a moderate growth rate and
increase their subscriber base enough to sustain
growth. We also believe that they will remain
profitable in the equipment segment of their wireless
revenues, as smartphones and tablets become more
affordable and newer versions continue to be
released.
We forecasted their wireline revenues to remain fairly
flat over our forecast period into 2018. We believe the
declining use of wireline services will be offset by
Verizon’s FiOS expansion and Global Enterprise
opportunities. We see opportunities in both of these
services for Verizon, however, with the high amount of
competition in the industry we do not believe Verizon
will grow substantially in these industries.
We have forecasted their cost of goods sold to remain
at an average of 38% of revenues throughout our
forecast period, leaving their profit margins fairly
consistent around 10-11%. Although Verizon is
making investments in areas like solar energy, which
could potentially decrease costs and improve margins,
we do not believe there will be significant change in
their expenses through our forecast period.
Verizon carries a large amount of debt on their balance
sheet and we have forecasted this debt to increase
around 5% per year due to potential acquisitions of
smaller providers and the need for telecom companies
to continuously upgrade and expand their network.
We believe that Verizon will need to continue these
upgrades as competitors like Google Fiber come into
the market. We have forecasted their debt to equity
ratio to be around 4.50 throughout 2018.
Our DCF valuation model gave us a target price of
$54.58. We assumed a WACC of 5.62%, using a 5 year
beta of 0.8 and the Henry Fund consensus market risk
premium of 4.64%. We chose to use the 5 year beta
as large enterprise telecom companies tend to remain
uniform over this time period. We also forecasted
Verizon’s terminal growth rate to be at 2% as do not
see major growth potential long-term as are already
saturated in much of the US market already.
Our DDM model gave us a target price of $59.71. We
believe this price is higher than our DCF valuation due
to their consistency in increasing their dividend yield
year over year. In 2nd quarter 2014 they increased
their yearly dividend to $2.20 per share, making their
•
yield 4.30%, which is greater than any of the other
major telecommunication carriers.
Our Relative P/E valuation model gave us a target price
of $125.47, however, when we removed the outliers,
it gave us a more reasonable price of $54.73. We used
Sprint, T-Mobile, AT&T, and Century Link as our
comparables, however Sprint and T-Mobile were
omitted in the $54.73 valuation due to extremely low
EPS figures and estimates.
KEYS TO MONITOR
We believe that Verizon Communications is the strongest
investment in telecom industry, and would be the best
addition to our telecommunications sector in the Henry
Fund. They have consistent earnings growth year over
year, and a high dividend payout in comparison to their
competitors. Some keys to monitor would include the
upcoming FCC auction of spectrum, of which many of the
large telecom companies are meant to participate in, as if
Verizon does not acquire a portion of this spectrum it
could be detrimental to their revenues. Additionally other
keys to monitor include watching any changes in FCC
regulations and how these changes could potentially
reduce revenues or increase profits for Verizon. Although
we don’t believe there will be substantial growth within
telecommunications as an industry as a whole, Verizon
Communications is the best investment at the moment
and we are recommending a BUY for Verizon
Communications stock in the Henry Fund.
Page 11
REFERENCES
1. Verizon 2013 10-K
2. Q3 2014 Earnings
3. Verizon.com, (2014). Verizon Completes
Acquisition of Vodafone's 45 Percent Indirect
Interest in Verizon Wireless | About Verizon.
[online] Available at:
http://www.verizon.com/about/news/verizoncompletes-acquisition-vodafones-45-percentindirect-interest-verizon-wireless/.
4. Wireless Telecommunication Providers – IBIS
World
5. M2M Now - News and expert opinions on the
M2M industry, machine to machine magazine,
(2014). Vodafone report shows adoption of
Machine-to-Machine (M2M) on the rise in the
Americas. [online] Available at:
http://www.m2mnow.biz/2014/08/18/23997vodafone-report-shows-adoption-machinemachine-m2m-rise-americas/.
6. Wireline Telecommunications Providers – IBIS
World
7. Goossens, E. (2014). Verizon Triples Solar Energy
With $40 Million Investment. [online] Bloomberg.
Available at:
http://www.bloomberg.com/news/2014-0825/verizon-triples-solar-energy-with-40-millioninvestment.html.
8. Statista.com.proxy.lib.uiowa.edu, (2014). Proxy
Login - The University of Iowa Libraries. [online]
Available at:
http://www.statista.com.proxy.lib.uiowa.edu/sta
tistics/203405/global-forecast-of-cloudcomputing-payments-revenue/.
9. Team, N. (2014). Verizon Completes Acquisition of
Vodafone’s 45 Percent Indirect Interest in Verizon
Wireless. [online] Verizon Wireless News Center.
Available at:
http://www.verizonwireless.com/news/article/20
14/02/verizon-completes-acquisition-vodafoneindirect-interest-verizon-wireless.html.
10. Fiber.google.com, (2014). Expansion Plans –
Google Fiber. [online] Available at:
https://fiber.google.com/newcities/.
Fund may hold a financial interest in the companies
mentioned in this report.
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Page 12
VERIZON COMMUNICATIONS
Revenue Decomposition
in millions
Fiscal Years Ending Dec. 31
Wireless
Service Revenue
YoY Growth
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
59,157
63,733
69,033
73,171
76,500
79,600
82,950
86,750
6.34%
7.74%
8.32%
5.99%
4.55%
4.05%
4.21%
4.58%
Equipment and Other
10,997
12,135
11,990
13,286
Equipment
Other
YoY Growth
7,457
3,540
41.39%
8,023
4,112
10.35%
8,111
3,879
-1.19%
9,237
4,049
10.81%
14,600
10,475
3,925
15,560
11,760
3,800
16,190
12,590
3,600
16,500
12,910
3,600
9.89%
6.58%
4.05%
1.91%
TOTAL WIRELESS
70,154
75,868
81,023
86,457
91,100
95,160
99,140
103,250
YoY Growth
10.64%
8.14%
6.79%
6.71%
5.37%
4.46%
4.18%
4.15%
Wireline
Mass Markets
16,337
16,702
17,328
18,046
18,750
19,460
19,905
20,510
YoY Growth
Global Enterprise
YoY Growth
0.50%
2.23%
3.75%
4.14%
3.90%
3.79%
2.29%
3.04%
15,622
15,299
14,703
13,969
13,875
13,785
14,050
14,160
-0.30%
-2.07%
-3.90%
-4.99%
-0.67%
-0.65%
1.92%
0.78%
Global Wholesale
7,973
7,240
6,714
6,263
5,875
5,550
4,990
4,070
YoY Growth
-5.00%
-9.19%
-7.27%
-6.72%
-6.20%
-5.53%
-10.09%
-18.44%
750
40,682
539
39,780
478
39,223
504
38,782
460
38,960
400
39,195
200
39,145
80
38,820
-0.83%
-
142,070
2.74%
Other
TOTAL WIRELINE
YoY Growth
Corporate, eliminations (gains) and other
TOTAL REVENUE
YoY Growth
-1.32%
(39)
-2.22%
(198)
-1.40%
(304)
-1.12%
-
0.46%
0.60%
-
-
-0.13%
-
110,875
4.04%
115,846
4.48%
120,550
4.06%
125,239
3.89%
130,060
3.85%
134,355
3.30%
138,285
2.93%
VERIZON COMMUNICATIONS
Income Statement
in millions
Fiscal Years Ending Dec. 31
Income Statement
Sales
COGS excluding D&A
Depreciation
Amortization of Intangibles
Gross Income
SG&A Expense
EBIT (Operating Income)
Nonoperating Income - Net
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
110,875
45,875
14,991
1,505
48,504
29,670
18,834
430
115,846
46,235
14,920
1,540
53,151
32,145
21,006
408
120,550
44,887
15,019
1,587
59,057
33,599
25,458
254
68
444
-82
57
324
27
64
142
48
130,060
50,227
15,300
1,808
63,125
35,684
27,249
65
65
134,355
52,187
15,500
1,868
65,121
36,754
30,105
67
67
138,285
53,240
15,650
1,922
67,473
37,857
31,407
69
69
142,070
54,697
15,800
1,975
69,598
38,992
32,450
71
71
Interest Expense
Unusual Expense - Net
Pretax Income
Income Taxes
Minority Interest
Net Income
2,827
5,954
10,483
285
7,794
2,404
2,571
8,946
9,897
-660
9,682
875
2,667
-6,232
29,277
5,730
12,050
11,497
125,979
47,980
15,187
1,578
61,234
34,644
29,090
1,210
44
1,741
-645
4,833
1,200
24,267
8,493
2,347
13,426
EPS (recurring)
Total Dividend Payment
2.31
5,597
2.49
5,803
2.48
5,982
Total Shares Outstanding
Dividends per Share
2,834
1.98
2,859
2.03
2,862
2.09
Nonoperating Interest Income
Equity in Earnings of Affiliates
Other Income (Expense)
-
-
-
-
5,281
22,033
7,712
200
14,121
5,545
24,628
8,620
200
15,808
5,822
25,654
8,979
200
16,475
6,113
26,408
9,243
200
16,965
3.87
9,070
3.39
9,531
3.80
9,704
3.95
9,711
4.07
9,843
4,159
2.18
4162
2.29
4165
2.33
4168
2.33
4171
2.36
VERIZON COMMUNICATIONS
Balance Sheet
in millions
Fiscal Years Ending Dec. 31
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
13,362
592
3,093
470
53,528
601
6,982
650
20,429
663
36,644
676
53,887
690
73,860
704
13,954
11,776
46
940
4,223
30,939
3,563
12,576
22
1,075
3,999
21,235
54,129
12,439
0
1,020
3,406
70,994
7,632
13,505
1,159
3,779
26,075
21,092
13,942
1,197
3,902
40,133
37,320
14,403
1,276
4,031
57,030
54,576
14,824
1,341
4,149
74,891
74,563
15,230
1,406
4,262
95,462
215,626
127,192
88,434
3,448
73,250
23,357
5,878
5,155
230,461
209,575
120,933
88,642
3,401
77,744
24,139
5,933
4,128
225,222
220,865
131,909
88,956
3,432
75,747
24,634
5,800
4,535
274,098
237,865
147,096
90,769
3,450
74,990
41,878
5,887
4,409
247,458
255,865
162,396
93,469
3,500
74,240
35,000
5,975
4,552
256,869
272,865
177,896
94,969
3,500
73,497
30,000
6,065
4,702
269,763
284,865
193,546
91,319
3,588
72,762
30,000
6,156
4,840
283,555
294,865
209,346
85,519
3,620
72,035
30,000
6,248
4,972
297,856
4,849
4,194
5,940
4,857
10,921
30,761
4,369
4,740
1,494
5,006
11,347
26,956
3,933
4,954
1,539
4,790
11,834
27,050
5,588
5,165
1,385
5,291
12,371
29,801
5,868
5,332
1,247
5,463
12,772
30,681
6,161
5,509
1,122
5,643
13,194
31,628
6,469
5,670
1,010
5,808
13,580
32,536
6,792
5,825
909
5,967
13,951
33,444
Long-Term Debt
Employee Benefit Obligations
Deferred Tax Liabilities
Other Liabilities
Total Liabilities
50,303
32,957
25,060
5,472
144,553
47,618
34,346
24,677
6,092
139,689
89,658
27,682
28,639
5,653
178,682
111,763
27,405
28,639
6,047
203,655
117,351
27,131
28,639
6,243
210,045
123,219
26,860
28,639
6,449
216,795
129,380
26,591
28,639
6,638
223,784
135,849
26,325
28,639
6,819
231,077
Common Stock & Additional Paid-In Capital
Retained Earnings
ESOP Debt Guarantee
Cumulative Translation Adjustment/Unrealized For. Exch. Gain
Unrealized Gain/Loss Marketable Securities
Other Appropriated Reserves
Treasury Stock
Total Shareholders' Equity
Accumulated Minority Interest
Total Equity
Total Liabilities & Shareholders' Equity
38,216
1,179
308
880
72
317
(5,002)
35,970
49,938
85,908
230,461
38,287
-3,734
440
881
101
1,253
(4,071)
33,157
52,376
85,533
225,222
38,236
1,782
421
966
117
1,275
(3,961)
38,836
56,580
95,416
274,098
36,966
6,138
421
1,008
120
1,300
(3,861)
42,092
1,711
43,803
247,458
36,970
10,729
421
1,040
120
1,300
(3,856)
46,724
100
46,824
256,869
36,974
16,833
421
1,075
120
1,300
(3,854)
52,869
100
52,969
269,763
36,978
23,597
421
1,106
120
1,300
(3,851)
59,672
100
59,772
283,555
36,982
30,720
421
1,137
120
1,300
(4,000)
66,680
100
66,780
297,856
Balance Sheet
Assets
Cash Only
Total Short Term Investments
Cash & Short-Term Investments
Accounts Receivables, Net
Other Receivables
Inventories
Other Current Assets
Total Current Assets
Property, Plant & Equipment - Gross
Accumulated Depreciation
Net Property, Plant & Equipment
Investments in unconsolidated businesses
Wireless Licenses
Net Goodwill
Net Other Intangibles
Other Assets
Total Assets
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt
Accounts Payable
Dividends Payable
Accrued Payroll
Miscellaneous Current Liabilities
Total Current Liabilities
VERIZON COMMUNICATIONS
Cash Flow Statement
Fiscal Years Ending Dec. 31
2015E
2016E
2017E
2018E
13,426
15,187
1,578
14,121
15,300
1,808
15,808
15,500
1,868
16,475
15,650
1,922
16,965
15,800
1,975
(1,066)
(139)
(373)
211
(154)
501
537
394
(277)
29,826
(437)
(38)
(122)
167
(139)
171
401
196
(274)
31,155
(460)
(80)
(129)
176
(125)
180
422
206
(271)
33,095
(421)
(65)
(118)
161
(112)
165
386
189
(269)
33,963
(406)
(65)
(114)
155
(101)
159
372
182
(266)
34,656
Investing Activities
(Increase) decrease in short-term investments
Capital Expenditures
Change in Intangible Assets
(Increase) decrease in other businesses
(Increase) decrease in wireless licenses
(Increase) decrease in other assets
Business Acquisitions (Change in Goodwill)
Net Investing Cash Flow
(49)
(17,000)
(1,665)
(18)
757
126
(17,244)
(35,093)
(13)
(18,000)
(1,896)
(50)
750
(143)
6,878
(12,474)
(13)
(17,000)
(1,957)
742
(150)
5,000
(13,378)
(14)
(12,000)
(2,013)
(87)
735
(138)
(13,517)
(14)
(10,000)
(2,067)
(33)
728
(132)
(11,518)
Financing Activities
Proceeds from Issuance of ST Debt
Proceeds from Issuance of LT Debt
Payment of Dividends
Proceeds from Issuance of Common Stock
Repurchase of Common Stock (Treasury Stock)
Change in Minority Interest
Change in ESOP Debt Guarantee
Change in Cumulative Translation Adjustment
Change in Unrealized Gain/Loss Marketable Securities
Change in Other Appropriated Reserves
Net Financing Cash Flow
1,655
22,105
(9,070)
(1,270)
100
(54,869)
42
3
25
(41,279)
279
5,588
(9,531)
4
5
(1,611)
33
(5,232)
293
5,868
(9,704)
4
2
34
(3,503)
308
6,161
(9,711)
4
3
31
(3,203)
323
6,469
(9,843)
4
(149)
30
(3,165)
Net Change in Cash
Cash, Beginning of the Period
Cash, End of the Period
(46,546)
53,528
6,982
13,448
6,982
20,429
16,214
20,429
36,644
17,243
36,644
53,887
19,973
53,887
73,860
Cash Flow
Operating Activities
Net Income
Depreciation
Amortization of Intangible Assets
Allowance for Doubtful Accounts
Changes in Working Capital:
Changes in Accounts Receivable
Changes in Other Receivables
Changes in Inventories
Changes in Other Current Assets
Changes in Accounts Payable
Changes in Dividends Payable
Changes in Accrued Payroll
Changes in Misc Current Liabilities
Changes in Deferred Taxes
Changes in other non-current liabilities
Changes in Employee Benefit Obligations
Net Operating Cash Flow
2014E
VERIZON COMMUNICATIONS
Common Size Income Statement
Fiscal Years Ending Dec. 31
Income Statement
Sales
COGS excluding D&A
Depreciation
Amortization of Intangibles
Gross Income
SG&A Expense
EBIT (Operating Income)
Nonoperating Income - Net
Nonoperating Interest Income
Equity in Earnings of Affiliates
Other Income (Expense)
Interest Expense
Unusual Expense - Net
Pretax Income
Income Taxes
Minority Interest
Net Income
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
100.00%
41.38%
13.52%
1.36%
43.75%
26.76%
16.99%
0.39%
100.00%
39.91%
12.88%
1.33%
45.88%
27.75%
18.13%
0.35%
100.00%
37.24%
12.46%
1.32%
48.99%
27.87%
21.12%
0.21%
100.00%
38.09%
12.06%
1.25%
48.61%
27.50%
23.09%
0.96%
100.00%
38.62%
11.76%
1.39%
48.54%
27.44%
20.95%
0.05%
100.00%
38.84%
11.54%
1.39%
48.47%
27.36%
22.41%
0.05%
100.00%
38.50%
11.32%
1.39%
48.79%
27.38%
22.71%
0.05%
100.00%
38.50%
11.12%
1.39%
48.99%
27.45%
22.84%
0.05%
0.06%
1.65%
-0.30%
0.05%
1.20%
0.10%
0.05%
0.53%
0.18%
0.03%
6.45%
-2.39%
0.05%
0.00%
0.00%
0.05%
0.00%
0.00%
0.05%
0.00%
0.00%
0.05%
0.00%
0.00%
2.55%
5.37%
9.45%
0.26%
7.03%
2.17%
2.22%
7.72%
8.54%
-0.57%
8.36%
0.76%
2.21%
-5.17%
24.29%
4.75%
10.00%
9.54%
3.84%
0.95%
19.26%
6.74%
1.86%
10.66%
4.06%
0.00%
16.94%
5.93%
0.15%
10.86%
4.13%
0.00%
18.33%
6.42%
0.15%
11.77%
4.21%
0.00%
18.55%
6.49%
0.14%
11.91%
4.30%
0.00%
18.59%
6.51%
0.14%
11.94%
VERIZON COMMUNICATIONS
Common Size Balance Sheet
Fiscal Years Ending Dec. 31
Balance Sheet
Assets
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
Cash Only
Total Short Term Investments
12.05%
0.53%
12.59%
11.34%
-0.72%
10.62%
0.04%
0.85%
3.81%
27.90%
58.99%
194.48%
114.72%
79.76%
3.11%
66.07%
21.07%
5.30%
20.63%
20.68%
2.67%
0.41%
3.08%
11.41%
-0.55%
10.86%
0.02%
0.93%
3.45%
18.33%
57.70%
180.91%
104.39%
76.52%
2.94%
67.11%
20.84%
5.12%
3.56%
194.41%
44.40%
0.50%
44.90%
10.85%
-0.54%
10.32%
0.00%
0.85%
2.83%
58.89%
59.72%
183.21%
109.42%
73.79%
2.85%
62.83%
20.43%
4.81%
3.76%
227.37%
5.54%
0.52%
6.06%
11.37%
-0.65%
10.72%
0.00%
0.92%
3.00%
20.70%
15.71%
0.51%
16.22%
11.37%
-0.65%
10.72%
0.00%
0.92%
3.00%
30.86%
27.27%
0.50%
27.78%
11.37%
-0.65%
10.72%
0.00%
0.95%
3.00%
42.45%
38.97%
0.50%
39.47%
11.37%
-0.65%
10.72%
0.00%
0.97%
3.00%
54.16%
51.99%
0.50%
52.48%
11.37%
-0.65%
10.72%
0.00%
0.99%
3.00%
67.19%
188.81%
116.76%
72.05%
2.74%
59.53%
33.24%
4.67%
3.50%
196.43%
196.73%
124.86%
71.87%
2.69%
57.08%
26.91%
4.59%
3.50%
197.50%
203.09%
132.41%
70.69%
2.61%
54.70%
22.33%
4.51%
3.50%
200.78%
206.00%
139.96%
66.04%
2.59%
52.62%
21.69%
4.45%
3.50%
205.05%
207.55%
147.35%
60.19%
2.55%
50.70%
21.12%
4.40%
3.50%
209.65%
4.37%
3.78%
5.36%
4.38%
9.85%
27.74%
3.77%
4.09%
1.29%
4.32%
9.79%
23.27%
3.26%
4.11%
1.28%
3.97%
9.82%
22.44%
4.44%
4.10%
1.10%
4.20%
9.82%
23.66%
4.51%
4.10%
0.96%
4.20%
9.82%
23.59%
4.59%
4.10%
0.84%
4.20%
9.82%
23.54%
4.68%
4.10%
0.73%
4.20%
9.82%
23.53%
4.78%
4.10%
0.64%
4.20%
9.82%
23.54%
Long-Term Debt
Employee Benefit Obligations
Deferred Tax Liabilities
Other Liabilities
Total Liabilities
45.37%
29.72%
22.60%
4.94%
130.37%
41.10%
29.65%
21.30%
5.26%
120.58%
74.37%
22.96%
23.76%
4.69%
148.22%
88.72%
21.75%
22.73%
4.80%
161.66%
90.23%
20.86%
22.02%
4.80%
161.50%
91.71%
19.99%
21.32%
4.80%
161.36%
93.56%
19.23%
20.71%
4.80%
161.83%
95.62%
18.53%
20.16%
4.80%
162.65%
Additional Paid-In Capital/Capital Surplus
Retained Earnings
ESOP Debt Guarantee
Cumulative Translation Adjustment/Unrealized For. Exch. Gain
Unrealized Gain/Loss Marketable Securities
Other Appropriated Reserves
Treasury Stock
Total Shareholders' Equity
Accumulated Minority Interest
Total Equity
Total Liabilities & Shareholders' Equity
34.47%
1.06%
0.28%
0.79%
0.06%
0.29%
-4.51%
32.44%
45.04%
77.48%
207.86%
33.05%
-3.22%
0.38%
0.76%
0.09%
1.08%
-3.51%
28.62%
45.21%
73.83%
194.41%
31.72%
1.48%
0.35%
0.80%
0.10%
1.06%
-3.29%
32.22%
46.93%
79.15%
227.37%
29.34%
4.87%
0.33%
0.80%
0.10%
1.03%
-3.06%
33.41%
1.36%
34.77%
196.43%
28.43%
8.25%
0.32%
0.80%
0.09%
1.00%
-2.96%
35.93%
0.08%
36.00%
197.50%
27.52%
12.53%
0.31%
0.80%
0.09%
0.97%
-2.87%
39.35%
0.07%
39.42%
200.78%
26.74%
17.06%
0.30%
0.80%
0.09%
0.94%
-2.78%
43.15%
0.07%
43.22%
205.05%
26.03%
21.62%
0.30%
0.80%
0.08%
0.92%
-2.82%
46.93%
0.07%
47.00%
209.65%
Cash & Short-Term Investments
Accounts Receivables, Gross
Bad Debt/Doubtful Accounts
Accounts Receivables, Net
Other Receivables
Inventories
Other Current Assets
Total Current Assets
Property, Plant & Equipment - Gross
Accumulated Depreciation
Net Property, Plant & Equipment
Investments in unconsolidated businesses
Wireless Licenses
Net Goodwill
Net Other Intangibles
Other Assets
Total Assets
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt
Accounts Payable
Dividends Payable
Accrued Payroll
Miscellaneous Current Liabilities
Total Current Liabilities
VERIZON COMMUNICATIONS
Value Driver Estimation
in millions
Fiscal Years Ending Dec. 31
EBITA
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
EBITA
110,875
45,875
14,991
1,505
29,670
31
18,865
115,846
46,235
14,920
1,540
32,145
31
21,037
120,550
44,887
15,019
1,587
33,599
25
25,483
125,979
47,980
15,187
1,578
34,644
24
26,614
130,060
50,227
15,300
1,808
35,684
24
27,066
134,355
52,187
15,500
1,868
36,754
24
28,071
138,285
53,240
15,650
1,922
37,857
24
29,641
142,070
54,697
15,800
1,975
38,992
24
30,630
Marginal Tax Rate
Income Tax Provision
Plus: Tax Shield on Interest Expense
Less: Tax Shield on Interest Income
Less: Tax Shield on Non-Operating Income
Plus: Tax Shield on Non-Operating Losses
Plus: Tax Shield on Op Lease Interest
Total Adjusted Taxes
Change in Deferred Taxes
NOPLAT
34.0%
285
961
23
151
2,052
11
3,135
(40)
15,690
33.1%
(660)
851
19
116
2,961
10
3,027
(420)
17,590
37.1%
5,730
989
24
2,383
9
4,322
5,836
26,997
35.0%
8,493
1,692
15
(36)
420
8
10,634
15,980
35.0%
7,712
1,848
23
8
9,545
17,520
35.0%
8,620
1,941
24
8
10,545
17,526
35.0%
8,979
2,038
24
8
11,001
18,640
35.0%
9,243
2,140
25
8
11,366
19,264
18165
#########
267
11,776
940
4,269
17,252
62
12,576
1,075
4,021
17,734
1,071
12,439
1,020
3,406
17,936
140
13,505
1,159
3,779
18,583
409
13,942
1,197
3,902
19,449
733
14,403
1,276
4,031
20,443
1,078
14,824
1,341
4,149
21,392
1,477
15,230
1,406
4,262
22,376
Current Operating Liabilities
Plus: Accounts Payable
Plus: Dividends Payable
Plus: Accrued Payroll
Plus: Other Current Liabilities
Total Operating Current Liabilities
4,194
5,940
4,857
10,921
25,912
4,740
1,494
5,006
11,347
22,587
4,954
1,539
4,790
11,834
23,117
5,165
1,385
5,291
12,371
24,212
5,332
1,247
5,463
12,772
24,813
5,509
1,122
5,643
13,194
25,467
5,670
1,010
5,808
13,580
26,067
5,825
909
5,967
13,951
26,652
Net Operating Working Capital
(8,660)
(4,853)
(5,181)
(5,630)
(5,364)
(5,024)
(4,675)
(4,276)
88,434
640
64,764
5,878
38,429
121,287
88,642
640
67,595
5,933
40,438
122,372
88,956
517
71,149
5,800
33,335
133,087
90,769
500
82,849
5,887
33,452
146,553
93,469
500
82,292
5,975
33,374
148,862
94,969
500
81,700
6,065
33,309
149,925
91,319
500
81,190
6,156
33,229
145,936
85,519
500
80,627
6,248
33,145
139,750
Value Drivers
NOPLAT
Beginning Invested Capital
Return on Invested Capital
15,690
40,670
38.58%
17,590
121,287
14.50%
26,997
122,372
22.06%
15,980
133,087
12.01%
17,520
146,553
11.95%
17,526
148,862
11.77%
18,640
149,925
12.43%
19,264
145,936
13.20%
Beginning Invested Capital
ROIC-WACC
Economic Profit
40,670
32.95%
13,403
121,287
8.88%
10,768
122,372
16.44%
20,114
133,087
6.38%
8,495
146,553
6.33%
9,278
148,862
6.15%
9,154
149,925
6.81%
10,208
145,936
7.58%
11,057
NOPLAT
Change in Invested Capital
Free Cash Flow
15,690
80,617
(64,927)
17,590
1,085
16,505
26,997
10,715
16,281
15,980
13,465
2,515
17,520
2,309
15,211
17,526
1,063
16,463
18,640
(3,989)
22,629
19,264
(6,186)
25,450
Revenue
Cost of Goods Sold
Depreciation
Amortization of intangibles
S,G,&A
Plus: Operating Lease Interest
Invested Capital
Current Operating Assets
Normal Cash
Plus: Accounts Receivable
Plus: Inventory
Plus: Prepaid Expenses & Other Assets
Total Operating Current Assets
Plus: Net PPE
Plus: PV of Operating Leases
Plus: Other LT Assets
Plus: Non-goodwill intangibles
Less: Other LT Liabilities
Invested Capital
VERIZON COMMUNICATIONS
Weighted Average Cost of Capital (WACC) Estimation
WACC = Re(E/V) + Rd(1-t)(D/V) + Rpfd(PFD/V)
Cost of Equity (Re)
Risk-free rate
Market Risk Premium
Equity Beta of Firm
Cost of Equity (Re)
3.07%
4.64%
0.80
6.78%
Cost of Debt (Rd)
Cost of Debt (Rd)
4.84%
Weight of Equity (E)
MV of Common Stock
Shares Outstanding (in millions)
Weight of Equity
50.49
4,150
209,534
Weight of Debt (D)
PV of Operating Leases
Current Portion of LT Debt
Market Value of LT Debt
Weight of Debt (D)
517
3,933
89,658
94,108
0
0
WACC Calculation
Re
Rd
E
D
V
(1-t)
Wd
We
WACC = Re(E/V) + Rd(1-t)(D/V) + Rpfd(PFD/V)
6.78%
4.84%
209,534
94,108
303,642
62.90%
30.99%
69.01%
WACC =
5.62%
VERIZON COMMUNICATIONS
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROIC
WACC
Cost of Equity
2.00%
13.20%
5.62%
6.78%
Fiscal Years Ending Dec. 31
DCF Model
Free Cash Flow
Periods to Discount
Discounted FCF
Sum of DCF's
Plus: Excess Cash
Plus: Short term investments
Plus: Long term investments
Less: Total Debt (including PV OL)
Less: Minority Interest Liabilities
Less: Employee Benefit Obligations
Less: ESOP
Value of Equity
Shares Outstanding
Share Price
Price Today
EP Model
Invested Capital
EP
Periods to Discount
Discounted EP
2014E
2015E
2016E
2017E
2018E
2,515
1
2,381
15,211
2
13,635
16,463
3
13,972
22,629
4
18,183
451,528
4
362,827
8,495
1
8,043
9,278
2
8,317
9,154
3
7,769
10,208
4
8,203
305,489
4
245,477
410,999
6,842
601
3,432
94,108
56,580
27,682
16,489
227,015
$
$
4,159
54.58
50.49
133,087
Sum of EP
Beginning Invested Capital
Plus: Excess Cash
Plus: Short term investments
Plus: Long term investments
Less: Total Debt (including PV OL)
Less: Minority Interest Liabilities
Less: Employee Benefit Obligations
Less: ESOP
Value of Equity
Shares Outstanding
Share Price
Price Today
277,809
133,087
6,842
601
3,432
94,108
56,580
27,682
16,489
226,912
4,159
$
54.56
$
50.49
Today
Next FYE
Last FYE
Days in FY
Days to FYE
Elapsed Fraction
11/20/2014 $
12/31/2014 $
12/31/2013
365
324
0.888
54.56
55.53
VERIZON COMMUNICATIONS
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31
EPS
2014E
$
Key Assumptions
CV growth
CV ROE
Cost of Equity
3.87 $
2015E
3.39 $
2016E
3.80 $
2017E
2018E
3.95 $
4.07
2.74%
12.00%
6.78%
Future Cash Flows
P/E Multiple (CV Year)
EPS (CV Year)
Future Stock Price
Dividends Per Share
Future Cash Flows
$
2.18 $
2.04
1
2.29 $
2.01
2
Discounted Cash Flows
Intrinsic Value
$
59.71
Today
Next FYE
Last FYE
Days in FY
Days to FYE
Elapsed Fraction
11/20/2014 $ 59.71
12/31/2014 $ 63.29
12/31/2013
365
324
0.888
2.33 $
1.91
3
2.33
1.79
4
19.08
4.07
77.63
4
59.71
VERIZON COMMUNICATIONS
Relative Valuation Models
Ticker
T
S
TMUS
CTL
Company
AT&T
SPRINT
T-MOBILE
CENTURY LINK
$
$
$
$
VZ
VERIZON COMMUNICATIONS
$ 50.49
Implied Value:
Relative P/E (EPS14)
Relative P/E (EPS15)
Price
33.66
6.09
29.36
39.94
EPS
2014E
$2.57
($0.19)
$0.22
$2.63
EPS
2015E
$2.62
($0.15)
$0.81
$2.60
Average
$3.87
$3.39
$ 125.47
$ 20.24
Average (omitting Sprint and T-Mobile as outliers)
P/E 14
P/E 15
14.1
14.1
Relative P/E (EPS14)
$ 54.73
Relative P/E (EPS15)
$ 47.86
P/E 14
13.1
(32.1)
133.5
15.2
32.4
P/E 15
12.8
(40.6)
36.2
15.4
6.0
13.0
14.9
VERIZON COMMUNICATIONS
Key Management Ratios
Fiscal Years Ending Dec. 31
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
100.58%
78.78%
262.45%
87.50%
130.81%
180.31%
230.18%
285.44%
30939
30761
21235
26956
70994
27050
26075
29801
40133
30681
57030
31628
74891
32536
95462
33444
97.52%
74.79%
258.68%
83.61%
126.91%
176.28%
226.06%
281.23%
29999
30761
20160
26956
69974
27050
24916
29801
38937
30681
55753
31628
73549
32536
94055
33444
Activity or Asset-Management Ratios
Inventory Turnover
48.80
Liquidity Ratios
Current Ratio
=Current Assets/
Current Liabilities
Quick Ratio
=(Current Assets - Inventory)/
Current Liabilities
43.01
44.01
41.40
41.98
40.89
39.69
38.89
45875
46235
44887
47980
50227
52187
53240
54697
940
1075
1020
1159
1197
1276
1341
1406
9.42
9.21
9.69
8.80
8.80
8.80
8.80
8.80
110875
115846
120550
125979
130060
134355
138285
142070
11776
12576
12439
14324
14788
15276
15723
16153
0.48
0.51
0.44
0.51
0.51
0.50
0.49
0.48
=Sales/
110875
115846
120550
125979
130060
134355
138285
142070
Total Assets
230461
225222
274098
247458
256869
269763
283555
297856
=Cost of Goods Sold/
Inventory
Receivables Turnover
=Sales/
Accounts Receivable
Total Assets Turnover
Financial Leverage Ratios
Debt/Equity
=Total Liabilities/
Total Equity
1.68
1.63
1.87
4.84
4.50
4.10
3.75
3.47
144553
139689
178682
203655
210045
216795
223784
231077
85908
85533
95416
42092
46724
52869
59672
66680
62.72%
62.02%
65.19%
82.30%
81.77%
80.36%
78.92%
77.58%
=Total Liabilities/
144553
139689
178682
203655
210045
216795
223784
231077
Total Assets
230461
225222
274098
247458
256869
269763
283555
297856
2.17%
0.76%
9.54%
10.66%
10.86%
11.77%
11.91%
11.94%
2404
875
11497
13426
14121
15808
16475
16965
110875
115846
120550
125979
130060
134355
138285
142070
1.04%
0.39%
4.19%
5.43%
5.50%
5.86%
5.81%
5.70%
2404
875
11497
13426
14121
15808
16475
16965
Total Assets
230461
225222
274098
247458
256869
269763
283555
297856
Return on Equity
2.80%
1.02%
12.05%
30.65%
30.16%
29.84%
27.56%
25.40%
2404
875
11497
13426
14121
15808
16475
16965
85908
85533
95416
43803
46824
52969
59772
66780
58.02%
Debt Ratio
Profitability Ratios
Net Profit Margin
=Net Income/
Net Sales
Return on Assets
=Net Income/
=Net Income/
Total Equity
Payout Policy Ratios
Dividend Payout Ratio
117.52%
323.27%
24.62%
67.56%
67.49%
61.39%
58.94%
=Dividends/
2825
2829
2830
9070
9531
9704
9711
9843
Net Income
2404
875
11497
13426
14121
15808
16475
16965
CV
Growth
CV
Growth
WACC
WACC
$ 54.58
1.40%
1.60%
1.80%
2.00%
2.20%
2.40%
2.60%
5.00%
62.18
66.04
70.40
75.33
80.96
87.47
95.06
5.20%
56.45
59.80
63.55
67.76
72.53
77.99
84.29
$ 54.58
1.40%
1.60%
1.80%
2.00%
2.20%
2.40%
2.60%
37.00%
46.50
49.02
51.81
54.90
58.35
62.23
66.63
37.50%
46.41
48.93
51.72
54.81
58.26
62.14
66.54
$ 54.58
5.00%
5.20%
5.40%
5.62%
5.80%
6.00%
6.20%
4.00%
75.31
67.74
61.06
54.57
49.81
45.03
40.70
$ 54.58
5.00%
5.20%
5.40%
5.62%
5.80%
6.00%
6.20%
0.50
75.33
67.76
61.08
54.58
49.83
45.05
40.72
5.40%
51.29
54.21
57.46
61.08
65.16
69.78
75.06
WACC
5.62%
46.19
48.71
51.49
54.58
58.04
61.92
66.31
5.80%
42.39
44.63
47.10
49.83
52.86
56.24
60.05
6.00%
38.52
40.50
42.66
45.05
47.68
50.61
53.88
6.20%
34.97
36.72
38.63
40.72
43.02
45.56
48.38
Cost of Sales
38.00%
38.30%
46.32
46.27
48.84
48.79
51.63
51.57
54.72
54.66
58.17
58.12
62.05
62.00
66.45
66.39
38.50%
46.23
48.75
51.54
54.63
58.08
61.96
66.36
39.00%
46.14
48.66
51.45
54.54
57.99
61.87
66.27
39.50%
46.06
48.58
51.36
54.45
57.90
61.78
66.18
4.25%
75.31
67.75
61.07
54.57
49.82
45.04
40.71
Cost of Debt
4.50%
4.84%
75.32
75.33
67.75
67.76
61.07
61.08
54.58
54.58
49.82
49.83
45.04
45.05
40.71
40.72
5.00%
75.33
67.76
61.08
54.59
49.83
45.05
40.72
5.25%
75.34
67.77
61.09
54.59
49.84
45.05
40.73
5.50%
75.34
67.77
61.09
54.60
49.84
45.06
40.73
0.60
75.33
67.76
61.08
54.58
49.83
45.05
40.72
0.70
75.33
67.76
61.08
54.58
49.83
45.05
40.72
0.90
75.33
67.76
61.08
54.58
49.83
45.05
40.72
1.00
75.33
67.76
61.08
54.58
49.83
45.05
40.72
1.10
75.33
67.76
61.08
54.58
49.83
45.05
40.72
Beta
0.80
75.33
67.76
61.08
54.58
49.83
45.05
40.72