Friday, January 8, 2010

Muted reaction as Verizon releases underwhelming earnings guidance (VZ)

Verizon CEO Ivan Seidenberg is speaking at the Citi Entertainment, Media and Telecommunications Conference, and in order to share information with all shareholders at the same time, they've updated current expectations for 2009's fourth quarter and full year.

Updated q4 guidance of 54cents per share is below consensus Wall Street expectations of 58cents.  The decline is due to lower revenue and weaker margins in the landline business.

A few notable points from the 8k just released:

- Verizon’s business plan is focused on growing revenues, reducing churn and increasing profitability and cash flow across all business units. Its long-term goal is that the combination of dividend growth and earnings growth will provide an average annual return to investors of approximately 10%.

- Verizon Wireless continues to expect that it will begin providing 4G Long-Term Evolution (LTE) service in 25 to 30 markets covering 100 million POPs (points of presence) by the end of 2010. In addition, within 24 months following its commencement of LTE service, Verizon Wireless expects to provide LTE service to 80 to 90 percent of the contiguous United States.
- Verizon expects that adjusted EPS for fourth quarter 2009 will be approximately $0.53 to $0.55. Verizon expects that strong wireless subscriber growth and device upgrades that were higher as a percentage of the retail postpaid customer base than in prior periods will cause wireless operating income margins to be lower in the fourth quarter 2009 than in the third quarter 2009. Verizon expects that the Wireline segment’s EBITDA margin will not improve in the fourth quarter 2009 as compared to the third quarter 2009 as a result of access line losses and economic conditions which continue to affect Verizon’s business markets.
So what is Verizon worth, given its goals of achieving 10% combined "total" return to shareholders annually?  I think it's worth about what it's currently trading at - an 11% Free Cash Flow Yield (FCFY).  11% is usually a pretty rich FCFY% for predictable, recurring free cash flows like Verizon's.  But one of my 2010 themes (to be released in a PDF in a couple days) is a coming downtrend in data plan rates in the mobile space, as well as in-home telecom plans.  This is an area in which Google and others have big, disruptive plans.  Put simply, the era of paying $200-400 for a mobile device and then paying $80-100 monthly for service on that device is not an era that will persist, so FCFY% had better be high enough in these names to compensate for the tumultuous times ahead in this industry.  To be continued...
Copyright 2010 AlphaNinja

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