Is It Safe? Verizon Is Poised to Bounce Back

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In the days of yore, tech and telecom walked hand in hand.

But as the Nasdaq has risen 16% this year, Verizon Communications(VZ Quote), America's telecom giant, has fallen 14%. Investors are skeptical about the company's growth prospects as U.S. cellphone penetration approaches 90% and Verizon missed the boat on Apple's(AAPL Quote) iPhone, the second-most popular smart phone after Research in Motion's(RIMM Quote) BlackBerry. Apple has sold more than 21 million iPhones worldwide.

At its current share price, Verizon is inexpensive and offers a dividend yield of 6.3%, almost twice that of the S&P 500 Index. With a price-to-earnings ratio of about 13, the company is nearly 20% cheaper than its average peer. Although a crest in revenue is a concern, 2009 and 2010 may hold a few upside surprises. TheStreet.com Ratings gives the company a "buy" recommendation.

Here are what the numbers show: Verizon's first-quarter revenue rose 12% to $26.6 billion as earnings per share climbed 2%. The cash balance fell 42% from the prior year's quarter to $4.35 billion as a result of the Alltel acquisition, which was completed in January and solidified Verizon's position as the largest U.S. wireless operator. The company has excessive leverage, as indicated by nearly $70 billion of debt and $952 million in quarterly interest expenses.

Verizon Communications holds a 55% stake in Verizon Wireless, a joint venture with Vodafone(VOD Quote). The wireless business boasts an industry-leading service margin of 46% and the lowest churn rate, a measure of customer turnover, of 1.1%. AT&T's is 1.2%. As cellphone growth tapers, Verizon must identify new sources of profitability. It has successfully done so in expanding its lineup of smart phones, such as the BlackBerry, and increasing the amount of revenue from expensive data plans.