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Why is Verizon no more a Buy stock?

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June 26, 2013 – Comments (0) | RELATED TICKERS: T , VOD , VZ

Verizon Communications Inc. (NYSE: VZ) is one of the largest U.S wireless operators. Verizon’s top and bottom line is continually mounting over the last three years. Despite the slow economy and low interest rates, telecom stocks are eye catching for investors because of solid dividend. AT&T, Inc. (NYSE: T) is a strong competitor of Verizon and both players control more than two-third of the U.S subscribers.

Verizon in talks with Vodafone

Vodafone Group Public Limited Company (NASDAQ: VOD) a global telecom operator hold a 45 % stake of Verizon wireless. Verizon wants to buy this stake in order to take the full control of the top U.S mobile company. Verizon’s executives estimated that Vodafone’s 45% stake has a total value of $100 billion and Vodafone will sell its stake only if Verizon pays in the range of $135 billion to $140 million. The probability of Vodafone to sell its stake is less because of the U.K tax hurdles.

Performance Analysis

Verizon reported strong revenue of $29.4 billion in the first quarter of 2013, up 4.2% from $28.2 billion last year and net income per share (EPS) of $0.68, up 15.3% from $0.59 last year. Improvement in the bottom line is the result of the lower cost and the attractive data plans. Revenue from Verizon's wireless segment raised 6.8% i.e. $19.5 billion. FiOS revenue surged 15.1% to $2.6 billion during the first quarter. Verizon reached a customer base of 98.9 million, up from 98.2 million during the first quarter by adding 720,000 new customers.

Canadian market an opportunity for Verizon

Verizon is now looking to make an entry in Canada by acquiring Wind Mobile, a Canadian wireless telecom operator. It is the fourth largest Canadian telecom operator with 600,000 customers. In Canada Rogers Communications, Telus Corp. and BCE Incorporation controls 90% of the total Canadian mobile market. Orascom Telecom, a subsidiary of VimpelCom controls 65% indirect ownership in Wind Mobile while remaining 35% stake is owned by the owner and CEO of Wind Mobile Anthony Lacarera. VimpelCom holds a 51.7 % stake of Orascom. Verizon has an experience of the Canadian market because of its previous investment in Telus Corporation, which it sold in 2004.

Acquisition and hurdles

Verizon management identified a number of opportunities in Canada. Verizon says that because of the lower buying cost, start-up cost and the presence of its enterprise customers, acquiring Wind Mobile is a considerable option. Some analysts say that the chances of consolidating of Verizon and Wind Mobile are minor. Verizon wireless having a joint venture with Vodafone needs to be agreed with Vodafone before acquiring Wind Mobile. Meanwhile, Verizon is in talks with Vodafone to buy out its 45% stake. Investing in Wind Mobile is not a million dollars but a billion dollar investment for Verizon and possibly Verizon will not invest as it would be a long-term undertaking.

Verizon’s competitors

According to the rumors, AT&T and Vodafone are also interested in investing in the Canadian mobile market. AT&T and Verizon Wireless control 65% of U.S wireless customers. In the U.S market, 1.1 million new wireless connections are created in the first quarter, but a decline of 60% was seen from the first quarter of 2012. Verizon has added 15 million new connections while AT&T has attracted 8 million customers since 2009. Because of the decline in the overall market, both AT&T and Verizon are looking to find new ways to generate additional revenue. Both companies are planning to generate revenue by increasing the charges on the existing customers. The only way to revenue growth is now by increasing the charges of existing Smartphone subscribers. AT&T has already started charging 61% monthly Mobility Administrative Fee. The company will generate approximately $775 million each year from more than 107 million wireless connections.

Conclusion

Verizon is facing difficulty in finding new customers due to which it is charging extra from the existing customers to generate revenue. It seems difficult that the Vodafone will sell its stake to Verizon. Verizon is looking at the opportunity of entering the Canadian wireless market and this will provide a new revenue stream but still there is uncertainty regarding its purchase of Wind Mobile. It is beneficial for investors to hold this stock.

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