Are Verizon Shares Trading at a Discount?

Verizon Communication(NYSE:VZ) has taken a big hit since the U.S. presidential elections, dropping about $2 or roughly 5%. With a dividend yield of a healthy 5%, an enviable position in a growing market with only one major competitor, and the largest subscriber base in the mobile market, is VZ right now a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Spectrum availability, or the lack of it, is the big challenge for giants Verizon and AT&T. Verizon’s recently approved acquisition of Advanced Wireless Spectrum from a group of cable companies gives them a near-term advantage over T, whose acquisition of T-Mobile was denied. However, AT&T is expected to outdistance VZ’s spectrum capability once they complete the current regulatory hurdles they face.  The mobile market is increasingly looking for faster communication and Verizon has a time sensitive advantage here as well. The company’s 4G LTE is expected to roll out in mid-2013, more than a year sooner than AT&T’s planned rollout in 2014.

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H = High Quality Product Pipeline

For the mobile carriers product pipeline is about devices and subscription plans. Verizon now has the coveted iPhone in its lineup and the company has at least 5 new phones in its pipeline. Verizon and its competitors are rolling out innovate data plans as the move to smartphones with better capability means more data use from customers.

E = Equity to Debt Ratio is Close to Zero

Verizon has a debt to equity ratio of 1.4, which is more than twice the debt to equity ratio of 0.63 at rival AT&T (NYSE:T). Their total debt of $52.8 billion with $10.3 billion total cash bests AT&T’s total debt of $63.6 billion with only $2.2 billion cash on hand.

T = Technicals on the Stock Chart are Strong

As of November 13, the stock price is 5.69 percent below its 20-day simple moving average, or SMA; 6.98 percent below the 50-day SMA; and 0.09 percent above the 200-day SMA. The Relative Strength Indicator is around 26, below the oversold threshold of 30 used by some investors but short of the 20 mark favored by more cautious investors. An RSI of 70 or 80 or above is an indication the stock is overbought and due for a fall while values between 20 and 30 or below signal a possible uptrend.

S = Support is Provided by Institutional Investors & Company Insiders

Verizon’s institutional ownership is on the light side for a Dow component at 54.2% but fares well when compared to AT&T where 57% of shares are institutionally held. Verizon’s top five holders are Vanguard Group, Capital World Investors, Capital Research Global Investors, BlackRock Institutional Trust, and Bank of New York Mellon. Insider transactions of 34.5% are relatively high, with seven major sales from Verizon corporate officers over the past year.  .

E = Earnings Are Increasing Quarter over Quarter

Verizon’s most recent quarter over quarter earnings showed a 14.43% increase, far superior to the 3.14% increase posted by AT&T.  However, neither company has shot the lights out over the past five years, with a decline of 18.83% at T and a drop of 14.7% at VZ.

E = Excellent Relative Performance to Peers

Although Sprint Nextel (NYSE:S) and T-Mobile compete with Verizon, the truth is VZ has only one real competitor in size, scope, and product offerings and that is AT&T. Both offer fiber optic television service and high speed Interest service.  On the popular Return on Equity metric, VZ’s 8.03% is almost twice that of the 4.14% return from T. On operating margins Verizon also emerges as a clear winner, with margins of 13.32% compared to AT&T’s 7.82%.

T = Trends Support the Industry in which the Company Operates

There is no question Verizon operates in a space with growth potential limited only by technological breakthroughs.  Technological advances have brought capabilities to the mobile market that existed only in dreams a decade ago. Not long ago phone reliability was the principal concern of mobile phone consumers. Today things like call quality are at the bottom of the list of the vast majority of consumers. The “smart” in smartphone is what they are after.

In a bold move Verizon is planning to enter the online streaming market, partnering with Redbox. When the plan was first announced there were doubts about finding content providers who might be reluctant to risk relationships with cable operators.  On October 25, 2012 Warner Bros signed on and the launch of the service, called Redbox Instant, may come as soon as Christmas.

Conclusion

Certainly Verizon will continue to lose land-line subscribers as will AT&T.  But the future is mobile, and not just phones but mobile devices of all kinds. There is room for growth in the number of mobile device users and existing users are looking for higher speeds. Verizon’s LTE coverage is twice that of AT&T. To put that into perspective, consumers who move from 3G coverage to 4G Long Tern Evolution will experience speeds 10 times faster than their old 3G dinosaurs. How can Verizon be anything but a BUY?

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