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Verizon_equity_analysis - U.S Equity Research...

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Please Read: Important disclosures and analyst’s certification appear in Appendix U.S. Equity Research Telecommunications June 17, 2009 Verizon Communications Initiating coverage with a Buy rating and $39 target ± We are initiating coverage of Verizon with a Buy rating and $39 price target based on our view that its market share gains will lead to profit growth that tops other telecom companies and Wall Street consensus estimates. ± We expect double digit revenue and EBITDA growth throughout 2009. Our 2010 EPS estimate of $2.80 compares to consensus of $2.67 and in the second quarter we expect EPS of $0.63, which is in-line with consensus. ± As the wireless industry passes 90% penetration, growth in revenue and profitability becomes a market share game demanding that investors pick winners and losers and we believe Verizon will be the primary winner. ± We believe that a critical change has occurred at Verizon Wireless under the leadership of Lowell McAdam that will lead to market share gains and revenue and EBITDA growth for Verizon that exceeds it peers based on willingness to embrace a more open strategy while maintaining its best in class network and strong customer care. Verizon ranked #1 in our Q2 survey of customer care response times. ± We expect Verizon to extend its gains over the next 3-5 years as disgruntled AT&T customers come off their two-year iPhone family plan contracts and Verizon expands its higher capacity and higher speed LTE network. ± We believe TracFone’s Straight Talk pre-paid offer on Verizon’s network teams up two best in class companies that will lead to further share gains for Verizon in a wireless voice industry that most already recognize is in decline. ± We believe the growth in FiOS will keep wireline margins under 25% which is likely under consensus but does not derail our estimates or investment rating. ± We do not expect Verizon to buy or sell Vodafone’s stake in its wireless business nor do we expect a material distribution in 2009. ± Our $39 price target is based on 14.0x our 2010 EPS estimate of $2.80 and implies 6.2x our 2010 EBITDA estimate and less than 10x free cash flow if we assumed $62.5 billion for Vodafone’s stake in Verizon Wireless. We expect $1.93 of dividends over the next 12 months implying an additional 6.5% yield. Walter Piecyk (212) 259-5177 T [email protected] U Joseph Galone (212) 259-5188 U [email protected] U VZ (NYSE): BUY Price $29.70 Target Price: $39 52 Week Range: $36.72 - $23.07 Market Cap. (USD billions): $84.4 VOD/Omnitel Interests $58.9 Net Debt (USD billions): $64.8 Avg. Daily Volume (100 day): 18,123,952 EPS 2008A 2009E 2010E Q1 $0.61A $0.63A $0.65E Q2 $0.67A $0.63E $0.71E Q3 $0.66A $0.63E $0.73E Q4 $0.61A $0.64E $0.72E FY $2.54A $2.53E $2.80E P/E 11.8 12.0 10.7 Consensus $2.53 $2.67 EBITDA ($bn) $32.6A $36.6E $38.7E Consensus ($bn) $36.4 $37.8 Source: Pali Research Estimates and Company Documents
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2 of 27 June 17, 2009 Conclusion – Buy Verizon We are recommending purchase of Verizon because we expect it to exceed consensus estimates based on wireless growth that exceeds expectations. Our bullish view on its wireless business is based on our expectation that Verizon will gain market share in the declining voice industry while emerging as the primary beneficiary of the growth in wireless data.
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