Verizon Downplays Slowdown but Cuts Back on Capital Spending

Verizon (VZ Quote - Cramer on VZ - Stock Picks) said it isn't feeling the impact of a slowing economy. But top-line weakness and Verizon's ailing Genuity (GENU Quote - Cramer on GENU - Stock Picks) wholesale Internet service affiliate continue to weigh on investors' minds.

Verizon Thursday met profit expectations for the fourth quarter, maintained 2001 earnings growth targets and boosted its 2001 revenue goal by a point to 8%, according to First Call/Thomson Financial analyst estimates. But sales at the nation's largest local phone company fell short of expectations for the fourth quarter and 2000.

The company, which is the product of the merger of Bell Atlantic and GTE, reported adjusted fourth-quarter revenue of $16.8 billion, nearly 10% below analysts' expectations. Sales for the year amounted to $63.4 billion, roughly $2 billion, or 3%, below consensus estimates.

At many tech companies, slower-than-expected growth would send investors running for the exits. But the rules are somewhat different for government-regulated reforming monopolies. Thus, despite the softness, Verizon shared dropped only 75 cents, or 1.3%, to $54.21, while Genuity slipped a quarter, or 6%, to $3.72.

Ringing Endorsement

"Nobody has runaway expectations for these guys," says Northern Trust money manager Michael Eggly, who doesn't own Genuity but holds a position in Verizon. "The Bells are the Bells. They look better in a bad market."

Perhaps feeling the pinch of a tough fourth quarter, the Baby Bell also said it cut about $400 million from its equipment and network expansion budget last year, dropping its capital spending budget to $17.6 billion.

Verizon told analysts on a conference call Thursday that it hadn't experienced a significant slowdown, making the spending cut sound more like a rounding error. But Verizon CFO Fred Salerno did raise the specter of further cuts.

"If there is any significant slowdown," said Salerno, "we have the levers in place to be careful about capital spending and expenses." Verizon expects to spend $18 billion on network expansion and communications equipment in 2001.

Verizon is the one of the biggest buyers in the equipment supermarket, so its spending forecasts tend to attract a lot of attention. And as a group, as telecos have resorted to more cash-saving efforts, the the communications equipment market has experienced a cooling of spending . Paul Meeks, portfolio manager of the Merrill Lynch Global Technolgy fund, says he has sold a lot networking shares to avoid the impact of the slowdown.

But Meeks, whose biggest holdings include Cisco (CSCO Quote - Cramer on CSCO - Stock Picks) and Tellabs (TLAB Quote - Cramer on TLAB - Stock Picks), doesn't feel certain there is any safe harbor for networking investments these days.

"Optical was the great rave last year," says Meeks, "but none of these guys can come out unscathed if there are massive cutbacks in spending, no matter how great they talk up their product stories."

No Backbone?

More troubling for some Verizon investors: Data communications company Genuity, spun out of GTE last year, reported Wednesday a steeper fourth-quarter loss due to network expansion costs and slow sales to service providers.

Genuity was spawned by federal regulatory mandate. As a local phone company, Verizon is prohibited from owning more than 10% of a long-distance communications service. Through a complex allocation of shares, Verizon, which now holds 10% of Genuity, can, upon approval of long-distance service in its 14-state region, convert its preferred class shares for 80% ownership of the company.

Genuity's success would be a prize bounty for Verizon to reacquire down the road, giving it business similar to Worldcom (WCOM Quote - Cramer on WCOM - Stock Picks) and UUNet. Without the prospect of Genuity's Internet business, Verizon would look like just another old-line phone company.

"I don't think anyone expected this theoretically high-growth business to be in the situation it is in," says Northern Trust's Eggly. "They have one of the premier Internet backbones in the country."

Aside from potential data services, Verizon's other growth engine is wireless, which accounted for a quarter of its sales in the fourth quarter. Once Verizon spins off its wireless business in an IPO this year, investors will have to prepare themselves for the return of 3% growth.