Is It Safe? Verizon Is Poised to Bounce Back

Verizon, which has a black eye because of its exclusion from the iPhone's success, has a lot to gain.
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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) - Get Report

, 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) - Get Report

iPhone, the second-most popular smart phone after

Research in Motion's

(RIMM)

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.

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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) - Get Report

. 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.

In addition, Verizon has entered the market for netbooks, low-cost portable computers with Internet capabilities and basic functionality. The company has an attractive model, selling the computers near cost and garnering profits from data plans. This is an important growth market, but Verizon will get the biggest boost if it's able to convince Apple to adopt a multi-service platform for its coveted iPhone brand. Apple is bound by an exclusive service agreement with AT&T until 2010, but is reportedly in talks with Verizon to expand its service options.

Not only is Verizon the largest U.S. wireless operator, but it also receives rave reviews from customers. A recent survey from Changewave, a research network, indicates that Verizon beats AT&T in customer satisfaction and fewest dropped calls. According to the survey, Verizon achieved 50% customer satisfaction while AT&T got 31%.

However, the survey points out that Verizon lags behind in demand. The disconnection between customer satisfaction and demand is explained by the iPhone. Regardless of AT&T's inferior coverage network and customer satisfaction, consumers will continue to use its service because they desire Apple products. This advantage seems to be temporary.

It's surprising that investors haven't yet embraced Verizon as a cheap Apple-play. Verizon is potentially a big winner.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.