Telecom & Wireless

The Bullish and Bearish Case for Verizon in 2014

This past year was a considerable one for stocks, with the S&P 500 index rising by more than 29.6% and the Dow Jones Industrial Average rising by 26.5%. Both major index readings were their highest closing bell prices ever. The question now is what to expect in 2014. 24/7 Wall St. has generated a bullish and bearish scenario for 2014 in each stock of the Dow, including an outlook and review for Verizon Communications Inc. (NYSE: VZ).

There are many factors to consider in telecom. Most Wall Street strategists are forecasting higher price targets for the Dow and S&P 500 in 2014. That will hopefully boost telecom as well. The Federal Reserve is about to be under a new chairman, and interest rates are expected to rise, as the bond buying under quantitative easing has already been telegraphed.

The world economies are exiting their recessions at the same time that U.S. gross domestic product is expected to tick up. The question is whether intense competition from AT&T Inc. (NYSE: T) and second-tier players like Sprint Corp. (NYSE: S) and T-Mobile US Inc. (NYSE: TMUS) will wreck Verizon.

Verizon’s total return in 2013 was 18.6%, and its current dividend yield for 2014 is 4.3%. At almost $48.50 at the start of 2014, Verizon’s consensus analyst price target is up at just over $54, and the 52-week trading range is $41.50 to $54.31. The telecom giant’s market cap is close to $139 billion as well.

The bullish scenario for Verizon is one that tablet use, smartphone use and Web connectivity remain under strong demand. The company has ramped up its earnings solidarity, now that it acquired the minority stake of Verizon Wireless from Vodafone Group PLC (NASDAQ: VOD). Verizon has a high dividend yield that should also not be pressured too much by rising interest rates, and it recently raised the dividend too. Verizon is also expected to have serious earnings growth in 2014 due to that Vodafone stake buyout.

Verizon’s bearish case is that the wireless landscape remains highly competitive, and the landline business is slowly shrinking through time. Another risk is that Verizon heaped on a mountain of debt to buy the rest of the wireless unit stake from Vodafone. That was the largest corporate bond offering in history. A price war in the sector likely will not help the bottom-line numbers for any of the players.

Verizon trades at about 13.7 times expected 2014 earnings, but about 17 times 2013 earnings. That is due to the 2014 earnings, including all the Verizon Wireless gains. But what if Verizon comes up short on earnings growth in 2014? Wall Street remains comfortable with the debt load after the Vodafone stake in Verizon Wireless, but then again those same Wall Street firms sold the debt to their financial clients.

Verizon is expected to post gains of about 11% in 2014 under the analyst targets, and that yield above 4% will imply gains of about 15% if they are right. Verizon is not an expensive stock, but it is now leveraged with close to another $50 billion in long-term debt compared to earlier in the year.

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