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Here’s Why You Should Hold Onto Verizon (VZ) Amid Risks

Zacks

On May 12, 2017, U.S. telecom behemoth, Verizon Communications Inc. VZ was upgraded by a notch to Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We believe the upgrade came on the back of Verizon Communications’ latest deal to acquire Straight Path Communications Inc., a leading provider of fixed wireless spectrum licenses, for $184.00 per share, or a total consideration of $3.1 billion, in an all-stock transaction. The deal is expected to close in nine months, subject to U.S. telecom regulator, Federal Communications Commission’s (FCC) review. Straight Path Communications’ 28 GHz and 39 GHz millimeter wave spectrum bands bode well for 5G wireless services.

Verizon has started conducting 5G wireless network trials in 11 U.S. cities and plans to deploy its fixed wireless version in 2018. The company also aims to deploy small cells using the 3.5 GHz spectrum band, which goes well with its 5G strategy. Verizon’s unlimited data plans have heated up the wireless industry.

Meanwhile, Verizon is likely to venture into online TV streaming service. The company has decided to come up with dozens of channels nationwide for the new service and thus pose tough competition to its closest rival AT&T Inc.’s T online TV streaming service — DirecTV Now.Verizon and International Business Machines Corporation IBM have recently decided to work on a number of strategic initiatives involving networking and cloud services. Verizon has also entered a $350 million discounted deal to acquire the core businesses of Yahoo! Inc. YHOO for $4.48 billion to create a major player in the mobile media and advertising space.


Verizon’s decision to launch FiOS Prepaid and FiOS Internet service, and zero rate its FiOS Mobile App data have helped it gain subscribers in the wireline segment in the first quarter of 2017. At the end of first-quarter 2017, FiOS video subscriber base was 4.681 million (up 0.1% year over year), FiOS Internet subscriber count was 5.688 million (up 3.3%) while FiOS digital voice residence connections totaled 3.887 million (down 0.8%). Moreover, Verizon Communications is also forging ahead to strengthen its presence in the Internet of Things (IoT) and fiber space through different deals.

On the flip side, spectrum crunch is a major issue in the U.S. telecom industry and Verizon continues to operate in asaturated and competitive wireless market. Expenses related to Verizon’s promotional plans and lucrative discounts to lure more customers might impact the wireless segment’s EBITDA and EBITDA service margins in the first quarter of 2017. Segment EBITDA decreased 7.5% to $9,414 million in the reported quarter. EBITDA margin was 45.1% compared with 46.2% in the prior-year quarter.

The company’s wireline division continues to struggle with persistent losses in access lines owing to competitive pressure from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data and video) offerings by cable companies. Notably, total revenue in the first quarter of 2017 decreased 7.3% year over year to $29,814 million, missing the Zacks Consensus Estimate of $30,504 million. These are weighing on the company’s revenues and margins. We believe these factors have led to the company’s below-par price performance.

Over the past three months, share price of Verizon lost 5.5% compared with the Zacks categorized U.S. Wireless National industry’s loss of 5.1%.

A legal notice from the city of New York in Mar 2017 in relation to its FiOS (Fiber Optic Service) rollout in the city came as a major setback. This shows the company’s failure to stand up to its commitments.

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