Verizon Is Overdue for a Rally

NEW YORK (TheStreet) -- Investors are revisiting the telecommunications companies for their perceived safety during this period of market turbulence and sector rotation. That means best-in-breed Verizon (VZ) is due for a move higher. Overdue, I believe.

The second-largest U.S. telecom, AT&T (T) has rallied 13% in the past five weeks while shares of Verizon -- which closed Monday at $48, off 2.1% for the year to date -- have underperformed. The following three-month chart illustrates AT&T's  share price movement.

T ChartT data by YCharts

Since AT&T's low of $31.76 on March 3, shares have soared to a high of $35.88 on April 4th. During the same five-week period Verizon stock went from $46.82 to $48.35, slightly more than a 3% rise.

Both companies have been competing to keep wireless customers while attracting new ones. AT&T's new subscriber plan called "Next" has been popular and contributes to positive expectations when the company reports its first-quarter earnings on April 22. Verizon has "More," as in "The More Everything Plan."

It competes handily with its aggressive rivals. I know because I recently shopped the three major wireless telecoms including T-Mobile (TMUS).

When I visited each companies' local store I asked for the best possible deal for my cell phone needs. Each had very similar pricing structures and the same no-contract-necessary promotions going on, but AT&T's Next plan was built around trading in my old phone and financing a new one over a 20- or 26-month period.

The Verizon More Plan, meanwhile, not only let me keep my old phone but it offers a better bandwidth strength no matter where I travel coast to coast, plusunlimited international messaging and more data. Plus if I want to upgrade I could do so faster than with AT&T.

Meanwhile, from an investment perspective, Verizon closed on its deal with Vodafone (VOD) in February and now controls 100% of Verizon Wireless. The transaction to purchase Vodafone's 45% interest in Verizon Wireless was immediately accretive to Verizon's earnings per share by approximately 10%.

Verizon is scheduled to report its first-quarter earnings April 24 and I think it will announce a year-over-year quarterly EPS gain of about 20%. I also anticipate a 4% increase in revenue for the quarter to around $30.6 billion. Along with the company's guidance this may help goose the stock's price.

Verizon offers a more sustainable dividend. Although AT&T has a 5.17% dividend yield versus Verizon's 4.4%, AT&T's dividend coverage represents 86% of free cash flow, according to the Wall Street Journal. Verizon's trailing 12-month free cash flow is nearly 60% higher, with a lower payout ratio. Verizon's dividend has room to rise while I sense AT&T's may be maxed out.

Looking at the three-month stock price chart of Verizon suggests it has yet to fully participate in the sector rally that helped boost AT&T's shares higher.

VZ Chart
VZ
data by YCharts

My 12-month price target for VZ is $54. That's nearly 12% above Monday's close. Like its rival, Verizon trades at a modest forward (one-year) PE ratio of 12.5, which compares favorably to the average forward PE ratio of the S&P 500 of 16.

With its 100% ownership of Verizon Wireless completed and its aggressive plans to attract and retain customers, look for its shares to pop before the end of this year.

At the time of publication the author had positions in VZ, T, TMUS and VOD.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

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