Verizon Communications Inc.: Acquisitions Could Help VZ Stock Soar

VZ stockVerizon Communications Inc. (NYSE:VZ) stock, the largest wireless carrier in the United States by subscribers, reported its third-quarter financial results on October 20.

Investors seem disappointed with the company’s quarterly performance, as VZ stock is trading downward. The company’s equity dropped 2.64% to $49.06 per share on Thursday afternoon.

Verizon stock still gained more than six percent in stock value year-to-date. Will the company succeed in executing its strategy for growth and push VZ stock up over the next quarters?

Verizon Stock 3Q Earnings Beat

Verizon stock reported that its adjusted earnings were $1.01 per share and revenue was $30.9 billion, which is down 6.7% in the third quarter. Wall Street analysts expected VZ stock to deliver earnings of $0.99 per share on $31.09 billion in revenue.

During the recorded period, Verizon stock added 442,000 postpaid wireless subscribers, including 357,000 new 4G LTE smartphones. It had 113.7 million retail connections by the end of the quarter, an increase of 2.6% year-over-year. Its retail post-paid connections base went up three percent to 108.2 million, while its total retail prepaid connections were 5.5 million.

The company’s “Wireline” segment added 90,000 “Fios” Internet connections and 36,000 Fios Video connections in the third quarter. VZ stock’s revenue from the business increased 4.4% from a year ago, driven by a larger customer base, strong customer loyalty, and demand for higher Internet speeds. Its Fios Internet base prefers a speed of 100 megabits per second or higher. (Source: “Strong wireless profitability and customer loyalty, renewed Fios growth highlight Verizon’s 3Q results,” Verizon Communications Inc., October 20, 2016.)

Aside from the company’s lower-than-expected revenue, VZ stock shareholders were also not pleased with its subscriber growth. Verizon’s 442,000 postpaid additions were significantly below the 766,300 estimated by analysts.

Management explained that subscriber growth was negatively affected by the recall of the “Galaxy Note 7” smartphones from Samsung Electronics Co Ltd (KRX:005930), and by a backlog of orders for the new “iPhone 7” from Apple Inc. (NASDAQ:AAPL).

Verizon is also confronting intense competition. T-Mobile US Inc. (NASDAQ:TMUS) and Sprint Corp (NYSE:S) have aggressive advertising strategies to convince customers to switch to their wireless networks.

Verizon Stock is Positioning Itself for Future Growth

In a statement, Verizon CEO Lowell McAdam said the company’s financial and operational results continue to be robust amid a highly competitive market. He added that the company has maintained its financial flexibility to invest in industry-leading networks to better serve its customers, bring innovation to the mobile media and Internet of Things (IoT), and increase dividends.

The company agreed to acquire the core Internet business of Yahoo! Inc (NASDAQ:YHOO) and Fleetmatics Group PLC (NYSE:FLTX), a global provider of fleet and mobile workforce management solutions. It also agreed to buy Sensity Systems to expand its smart city solutions. Verizon also completed its acquisition of Telogis in July.

Verizon launched “LTE Advanced” in more than 460 markets to maintain its network leadership. It also aims to be the first company to offer a 5G fixed wireless broadband solution in the United States. Its 5G technical trials were successful, and it is planning a commercial pilot program in 2017 to test the technology in different environments with several infrastructure providers.

Management noted a high demand from advertisers for AOL, Inc.’s (NYSE:AOL) programmatic capabilities and high-quality data analytical tools. AOL’s net revenue for the quarter was $486.0 million, up by 10%. Its IoT revenues grew 24% organically to $217.0 million from the same period last year. Its network usage rose 45%, driven by digital video.

Verizon acquired a vast portfolio of digital rights and it invested in specific assets to create, distribute, and publish digital content. These assets are expected to help strengthen the competitiveness and growth of its digital media business.

The Bottom Line for VZ stock

Verizon is confident that it is well positioned to increase its earnings and revenue over the long term with its new and impending acquisitions, including Yahoo, and other strategies. Yahoo is expected to expand its scale in the digital media space, serve unmet customer needs, participate in digital publishing, and monetize content. Aside from strong advertising demand for AOL, it sees increased user engagement for its “go90” app, and new business opportunities for IoT globally.

The company is financially healthy, with an improving balance sheet. It ended the third quarter with $4.8 billion cash flow from operations. Its free cash flow was $700.0 million. Its total assets were $239.49 billion, and its total debts were $106.59 billion. (Source: “Financial Statements,” Verizon Communications Inc., last accessed October 20, 2016.)

Verizon is committed to returning value to investors. Its board approved a 2.2% increase in dividend.  The company’s quarterly dividend is $0.57 per share of VZ common stock.  It paid $2.3 billion in dividend in 3Q, bringing the total to $6.9 billion year-to-date.

Today’s decline in Verizon stock is just a temporary overreaction to its lower-than-expected subscriber growth and revenue. Take note that Verizon is very profitable. Its annual earnings growth rate is impressive at 16.8% over the past four years.

A majority of Wall Street analysts are advising investors to hold their stakes in Verizon. They are predicting that VZ stock could trade as much as $60.00 per share, an upside of 19% over the next 12 months.