Market Woes Don’t Faze Verizon

Shares of Verizon (VZ) rose over 10% during today’s trading session reflecting a better than expected earnings over the last quarter with a diluted EPS of $0.59 cents and $0.66 cents in adjusted EPS (non-GAAP), compared with 3Q 2007 diluted EPS of $0.44 cents reported and $0.63 cents adjusted.  Even with recessionary fears swirling around the market, Verizon has been able to grow its business with adjusted revenues up 5.4% percent to $24.8 billion, including a 39.6% jump in broadband and video sales.

Diluted EPS reflects a $164 million after-tax charge for severance, pension, and benefit charges and $32 million after-tax for merger integration costs.

Wireless is King

Verizon Wireless, a joint venture with Vodafone Group (VOD), once again provided the consistency that has helped VZ grow even as the rest of the market falters. This quarter Verizon added 2.1 million customers and increasing total revenues by 12.5%.  They added 630,000 of those new customers through its purchase of Rural Cellular on Aug. 7, 2008.  The acquisition has helped Verizon expand its already nationwide coverage to new rural markets not yet tapped.  Also, operating income margin was up 20 basis points year over year to 27.3% percent.

As expected, Verizon’s wireline service continues its decline with operating revenue down 1.7 percent from a year ago while shedding 571,000 primary residence lines in the last quarter.  But where they had losses in home phone lines, they more than made up for in new customers hopping on the FiOS bandwagon.  Verizon added 233,000 net new FiOS TV customers and 225,000 net new FiOS Internet customers up from 176,000 and 187,000 respectively last quarter.  The continued expansion of FiOS and a 12.8% increase in consumer ARPU (average monthly revenue per customer) helped fuel a 2.%1 increase in consumer revenues.

Words from Chairman and CEO Ivan Seidenberg:

“Although the capital markets and economy may present challenges, we will continue to execute on our business plan and invest for future growth,” he said.  “We increased the dividend 7% this quarter, reflecting confidence in continued growth opportunities.  Verizon has a great set of assets and an employee team focused on creating value for our customers and shareholders.”

Alltel Acquisition Sluggish

Back in June, Verizon reported a potential equity acquisition of Alltel Corporation and as the credit markets have deteriorated, so has the ease of the deal.  The terms of the deal will have Verizon Wireless acquire the equity of Alltel for approximately $5.9 billion and after adding in net debt, will have an aggregate value around $28 billion.  VZ Wireless is expecting synergies of more than $9 billion from reduced capital and operating expense savings and are projecting incremental cost savings of $1 billion the second year after the deal is finalized.  With the terms of the deal already set, the problem is with finding the financing to fund the deal and that could prove very costly and extremely time consuming.  The deal will remain a headache until funding can be determined, but when complete, Verizon will be the largest wireless provider in the country after adding Alltel’s 13 million customers.

Looking Forward

It would be an understatement to say that the rivalry continues between Verizon and AT&T (T) for dominance of the U.S. wireless phone market, but Verizon has shown that their projected $23 billion price tag for rolling out their fiber optics initiative is beginning to pay dividends.  With the two dueling for the upper hand with wireless customers, they continue to battle in new markets: AT&T’s iPhone and VZ’s FiOS.  It is expected that as the iPhone’s penetration continues to rise, more and more Verizon customers will be lost, however Verizon has something AT&T doesn’t in FiOS and customer growth is exploding.  Both of these companies have rock solid balance sheets and have fallen hard in 2008 yet still have reported blow-out earnings for the third quarter.  If you can’t pull the trigger in this market (I don’t blame you) or don’t think they will make a huge turnaround until the credit crisis cools, you can wait things out with a nice fat 6.5% yield.  Take your pick.

Disclosure: The mutual fund the author is associated with is long T.

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