Verizon Could Get Boost From Cost Cuts

Verizon had a profitable second quarter due to extensive workforce cuts and a decline in capital expenditures.
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Verizon

(VZ) - Get Report

boosted profits last quarter by cutting costs while maintaining revenue growth.

Verizon competes primarily with

AT&T

(T) - Get Report

and

Sprint Nextel

(S) - Get Report

in the U.S. wireless telecom market.

The company's second-quarter earnings report noted that its cost structure had benefited from workforce reductions and declining capital expenditures as Verizon completes its 4G LTE network upgrade.

Based in part on this news, we have raised the Trefis price estimate for Verizon's stock from $33.14 to $33.90. Our analysis follows below.

Verizon has eliminated 24,000 jobs in the past year, or about 10% of its total workforce. Most of the job eliminations came from the company's Landline segment. We believe these reductions will help Verizon reduce its selling, general and administrative costs (SG&A) and increase its overall profitability.

As a percentage of gross profits, we expect Landline SG&A to decline from 25% in 2009 to around 18% by the end of the Trefis forecast period. You can drag the trend-line in the chart below to create your own Landline SG&A as percentage of gross profits forecast for Verizon and see how it impacts the company's stock price.

In the optimistic scenario where Verizon's workforce-related cost reductions exceed our expectations, driving Landline SG&A % of Gross Profits down to 16% by 2016 instead of the 18% that we currently forecast, there could be a 10% upside to our price estimate for Verizon's stock.

Verizon's wireless capital spending has been on the rise for the past few years due to a major LTE network upgrade that should significantly increase network speeds. Verizon plans to complete this upgrade by the end of 2010. Thereafter, the company expects overall capital spending to decline.

Meanwhile, Verizon's landline capital expenditures have slid in recent years. Going forward, we expect reduced landline spending declines to more than offset increased wireless spending.

In the charts below, you can drag the trend-lines to create your own forecasts for wireless and fixed-line capital spending as a percentage of gross profits, respectively, and see how they impact Verizon's stock price.

:

We expect Verizon's wireless capital expenditures to increase from 17% of gross profits in 2009 to 24% by the end of the Trefis forecast period. However, if Verizon manages to cap its wireless capex spending at around 20% of gross profits by 2016, there could be an additional upside of 10% to our Verizon price estimate.

You can see the complete $33.90 Trefis Price estimate for Verizon's stock

here

.

Trefis

is a financial community structured around trends, forecasts and insights related to some of the most popular stocks in the U.S.