Verizon Communications Inc. (VZ) Is a Buy: Here’s Why

Stock performance

After closely reviewing Verizon’s share price, we observe that it has appreciated by approximately 20% during the early part of 2013. A five-year stock performance chart (below) reveals that Verizon has outperformed the S&P 500, whereas both AT&T and Sprint Nextel have underperformed the index during the same period

Five-year stock performance of Verizon, AT&T and Sprint vs. the S&P 500

(Source: Yahoo! Finance)

Wireline business division

Verizon Communications Inc. (NYSE:VZ)’s wireline division has predominantly under-performed, as EBITDA margins declined from 27% during 2008 to 20% by the end of fiscal 2012. The company has established a network of  high-speed fiber optic cables (FiOS), which can provide bandwidth as high as the cable operators.

However, the penetration of FiOS is extremely low (between 10% and 15%) and the cost of expansion is relatively higher. This, coupled with increasing competition from the cable players, will make it harder for Verizon to report growth in the wireline business.

Take away

The ongoing discussions for the sale of Vodafone Group Plc (ADR) (NASDAQ:VOD)’s 45% stake in Verizon Wireless is potentially a $100 billion deal that would enable Verizon complete control over its wireless operations. I believe this will allow the company to realize its full potential in the U.S. telecom market.

Verizon Communications Inc. (NYSE:VZ) is expected to raise $50 billion by issuing debt instruments in order to fund the buyout. If the transaction goes through, it’s expected to increase the company’s free cash flow, implying a higher valuation. Besides owning the entire wireless business, it will add immense value to the company, especially in an environment where interest rates are relatively low and the company is outperforming its rivals in the rapidly-growing wireless market.

The article Why You Should Go Long on Verizon originally appeared on Fool.com and is written by Kiran Gulati.

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