Verizon Communications

1
Verizon Communications

• RBOC
• DATA
• EQUIPMENT
• INTERNET
• VOICE
• WIRELESS
• PAGING
• .
• OPPORTUNITY

Screen Thief
Utilize Slide Master for consistent formatting
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Basic Stock Statistics

• Ticker - VZ
• Sector - Telephone
• Industry - Telecom
• Large Cap Stock
• Shares Outstanding - 2.6991 billion
• Market Cap - 140.353 billion
• Dividend - 1.54
• Yield - 3.0

• 52 Week High - 65.19
• 52 Week Low - 40.38
• Recent Price - 52.00
• Return YTD - 4
• NYSE Traded
• Beta - .68
• Average Daily Volume - 4,930,000 shares
• Internet - www.verizon.com

Source Zacks, Quicken
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Basic Stock Statistics Cont.

• Institutional Ownership - 42.40
• Insider Ownership - .04
• Sales Growth - 32
• Earnings Growth - 10
• Dividend Growth - 1
• Consensus Analyst Rating Strong Buy / Buy

• EPS
• 1998 1.86
• 1999 2.65
• 2000 3.11
• 2001 (e) 3.12
• 2002 (e) 3.51
• P/E
• Current 16.7
• 5 Yr. Avg. 17.8
• Industry 20.0
• SP 23.8

Valueline, Multex, Zacks, Quicken
Zacks, Microsoft Money
Microsoft Money
Microsoft Money
Microsoft Money
Source Zacks, Quicken
4
Verizon Competitors

• SBC Communications
• BellSouth Communications
• Qwest Communications
• McLeod USA
• Broadwing Incorporated

Source Quicken
Screen Thief
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Services

• Business
• Data services, business phone lines, Internet
  access, long distance, payphones,
  telecommunications equipment, enhanced calling
  services
• Wireless
• Wireless service plans, wireless phones (cellular
  phones), wireless data services and phone
  accessories
• Government
• Integrated network solutions for the federal
  government, including business phone lines,
  Internet access, data services, long distance,
  payphones, enhanced calling services,
  telecommunications equipment
• Home Family
• Residential phone lines, long distance, Internet
  access, enhanced calling services, service
  packages, phones accessories, video service
• Wholesale
• Verizon offers a comprehensive range of products
  and services for long distance providers,
  wireless carriers, Internet service providers,
  local service providers (resellers, ILECs, CLECs,
  and DLECs), and pay phone providers.
• Source Company website or 10-K

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Industry Chart - 5 Years
Source Big Charts, use screen thief
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Industry Analysis

• Industry Review
• These stocks tracked markedly lower in 2000 after
  reaching record highs earlier in the year. The
  reasons given for this huge drop included
• Accelerating competition
• Rising capital budgets
• Declining free cash flow
• Falling revenue and earnings estimates.
• Especially hard-hit were the long-distance
  players (T and WCOM) and some of the smaller
  companies, especially in wholesale fiber-optics
  (XO).
• Source ValueLine or 10-K

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Industry Analysis

• Long Distance
• Long distance companies have increasingly come
  under fire as their chief revenue producer
  becomes seen as a commodity, at the same time
  they are seeing more competition from Regional
  Bell Operating Companies (RBOCs), and less demand
  as consumers substitute wireless and Internet
  alternatives for communication.
• These firms are trying to recover by splitting
  off their slow growth offerings and trying to get
  the market to unlock the value they feel is
  hidden in some of their growth products.
• WCOM plans to break off its long-distance entity
  under the MCI moniker and have it pushed as an
  income producing stock, while it puts its high
  growth Internet, wireless, data, and
  international operations under the growth stock
  Worldcom.
• ATT plans to similar things by breaking apart
  its Consumer (income, no growth), Business
  (Growth and Income), and Wireless (Growth)
  businesses
• Source ValueLine or 10-K

9
Industry Analysis

• Baby Bells (RBOCs)
• Followed the traditional Long Distance operators
  by reducing near-term performance expectations,
  although their situation appears to be much
  brighter than their counterparts.
• These firms recently spun off their wireless
  operations in an attempt to get the issues IPOd
  in order to unlock that avenue to raise
  additional capital (a necessity in this
  industry.)
• Poor market conditions for telecom stocks have
  reduced the ability for both Verizon Wireless
  (Verizon) and Cingular (BellSouth) to IPO and
  have delayed some expansion projects.
• These firms are also spending heavily to expand
  DSL service and bring fiber-optic lines closer to
  customers. This has benefited many small
  Telecoms like McLeod USA.
• Source ValueLine or 10-K

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Verizon 1 Year Chart
Source Big Charts, using screen thief
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Verizon 5 Year Chart
Source Big Charts, using screen thief
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Verizon Business Description

• Verizon Communications, formed by the merger of
  GTE and Bell Atlantic, is one of the worlds
  leading providers of high-growth communications
  services. Verizon companies are the largest
  provider of wireline and wireless communications
  in the United States. Verizon is also the
  worlds largest provider of print and online
  directory information.
• Source Zacks, Yahoo Finance/Profile, Multex

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Business Background

• Largest U.S. Wireline provider
• 63 million access lines and 101 million voice
  grade equivalents
• In 67 of the top 100 markets
• Largest U.S. Wireless provider
• 26 million customers and 4 million paging
  customers
• In 97 of top 100 markets
• International Operations in 40 countries with 7
  million customers.

Screen Thief
Source Company website
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Good Company News
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• Growth Abroad
• Verizon is working on fusing together a global
  network that is aimed at lucrative corporate
  clients
• Ever since the telecom deregulation act, the
  company has been expanding its reach out from the
  eastern U.S., and it plans to accomplish this
  expansion over the networks of several
  independent carriers that it owns a stake in like
  Flag Telecom and Metromedia Fiber Network.
• Most of the push will be broadening the companys
  reach in Asia, Europe, and Latin America.
  Verizon wants to be able to carry customers data
  and voice calls over their networks from
  inception to their termination internationally.
• Source CBS Marketwatch lthttp//www2.marketwatch
  .com/news/yhoo/story...

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Good Company News

• Growth Abroad
• The primary reason why Verizon is so adamant on
  keeping the information on their networks the
  whole way is because right now they have to hand
  off international traffic to established global
  carriers (EGC) who receive a fee for terminating
  those calls.
• By cutting out the middle men, Verizon could keep
  those fees for themselves, which allows them to
  boost their own profits at the expense of rivals.
  These savings are expected to add up to 300
  million over the next 5 years.
• This move also allows Verizon to target more
  multinational customers, unlock their networks
  true value, and diversify their customer base.
• Source CBS Marketwatch lthttp//www2.marketwatch
  .com/news/yhoo/story...

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Good Company News
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• Growth Abroad
• Verizon has as good a shot at the international
  market as anyone because the global market is
  already crowded with large carriers like ATT,
  Worldcom, and British Telecom, but few are
  positioned to dominate, leaving the door wide
  open for entry.
• This is especially good for a fast rising
  challenger like Verizon, who currently is only
  able to offer long-distance or data services to
  companies in New York or in areas not part of its
  original 13 state RBOC area.
• They are expected to win regulatory approval to
  sell long-distance in Mass., Conn., NJ, Penn.,
  and RI later this year, as the company is able to
  prove to regulators that its original RBOC market
  is open to competitors.
• Source CBS Marketwatch lthttp//www2.marketwatch
  .com/news/yhoo/story...

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Good Company News
Screen Thief

• Wireless Auction
• Verizon Wireless (the companys joint venture
  with Vodafone Group) ended up being the big
  winner at the recent FCC auction for wireless
  spectrum.
• The company ended up shelling out 8.78 billion
  for 113 licenses.
• The company plans on using the newly acquired
  spectrum for its current business without having
  to wait to deploy 3G networks and the costs
  associated with them.
• These licenses are more of padding for the
  companys existing spectrum, rather than a
  fulfilling of a dire need. This will allow them
  to grow their current business and have room for
  capacity expansion that should stoke revenue.
• Source Thestreet.com lthttp//thestreet.com/_
  yahoo/tech/telecom/1279266.html

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Good Company News
Screen Thief

• Wireless Auction
• Maybe even more beneficial for the company than
  winning the spectrum for themselves is that they
  kept it out of the hands of the 2 company in the
  industry, Cingular Wireless.
• Cingular only has about 10 megahertz of spectrum
  in New York City, and needs at a minimum another
  10 megahertz to provide full service in the area.
• This benefits Verizon because NY is the companys
  top market, and it costs half as much for VZ to
  provide service in the area as Cingular because
  they already have the towers and cell sites in
  place, whereas Cingular doesnt.
• Source Thestreet.com lthttp//thestreet.com/_
  yahoo/tech/telecom/1279266.html

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Good Company News
Screen Thief
Avoid press releases from the company, most of
these contain trivial information. Focus on
information from articles

• Strong DSL and Long Distance Growth
• Verizon had 540,000 DSL customers at the end of
  the year 2000 which is up from the 350,000 that
  they had in September of that year, and even more
  than the 500,000 that was the companys goal.
• The company also upped their earnings estimates
  for 2001 on news that they would no longer
  acquire troubled DSL provider NorthPoint
  Communications (another poor CLEC.)
• The company won 20 of the NY long-distance
  market in its first year of being able to compete
  there, and expects to see similar growth when it
  enters into other areas that it was previously
  barred from competing in, in the Northeast.
• Source Reuters lthttp//biz.yahoo.com/rf/0101
  28/n2689576_2.html

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Bad Company News
Screen Thief
Avoid press releases from the company, most of
these contain trivial information. Focus on
information from articles

• Brain Tumor Lawsuit
• Verizon Wireless could face up to 10 compensation
  claims (which may amount up to billions of
  dollars in damage) from brain tumor victims in
  the U.S.
• This stems from a lawsuit that charges all
  wireless providers with covering up that
  radiation from mobile phones cause cancer.
• Leading the lawsuits is Peter Angelos, owner of
  the Baltimore Orioles and the lawyer who recently
  helped win 4.2 billion from the tobacco industry
  in Maryland. His involvement should lead to the
  largest study ever done on the affects of mobile
  phone radiation, and could lead to future
  monetary problems for all firms in the industry.
• Source Thestreet.com lthttp//www.thestreet.c
  om/_yahoo/tech/telecom/1231544.html

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Bad Company News
Screen Thief

• Problems with Verizon Wireless IPO
• The IPO of the joint venture with Vodafone has
  been delayed numerous times as investment bankers
  for the group continue to wait for improved
  market conditions before floating the issue.
• The issue has been delayed since October numerous
  times as a poor market for telecom issues hurt
  the potential of a successful IPO.
• If it continues to get put off, the need for
  increased capital funding from its parents may
  detract from their ability to invest in other
  ventures.
• Source Mourningstar lthttp//biz.yahoo.com/ms
  /010201/4216.html

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Bad Company News
Screen Thief

• Poor Service Plaguing DSL Operations
• A lawsuit filed in January charged that Verizon
  misled consumers about the quality and
  availability of its high-speed, always on DSL
  service, and failed to tell consumers of service
  and installation problems.
• A example was given of a Massachusetts man who
  signed on with Verizon, but gave up after several
  false starts, one of which involved the company
  giving him the wrong equipment, another involving
  a billing problem, and the consistent cry of poor
  service. After giving up, he attempted to use
  Earthlinks service, but a Verizon phone line was
  needed and when he requested its use, he was told
  it was not available.
• Source Reuters lthttp//biz.yahoo.com/rf/0101
  28/n2689576_2.html

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Bad Company News

• Poor Service Plaguing DSL Operations
• The lawsuit seeks damages and an order that
  Verizon not be able to sign up any more DSL
  customers until the problems are resolved.
• This could result in DSL customers being sent to
  competing formats such as cable access for their
  high-speed Internet needs, and slow the
  phenomenal growth the company has been
  experiencing in that market.
• Verizon is also facing another hearing in New
  York about whether the company is providing fair
  access to its lines for competing DSL providers.
• Source Reuters lthttp//biz.yahoo.com/rf/0101
  28/n2689576_2.html

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Bad Company News

• Job Cuts
• Verizon plans to cut approximately 10,000 jobs
  this year as a part of a continuing effort to
  eliminate positions duplicated by last years
  purchase of GTE and to meet the cost cutting
  goals set in the merger.
• Most these are expected to be done through not
  filling vacancies, cutting overtime, and using
  contractors, although layoffs are possible.
• The company has 260,000 employees, so they feel
  that normal attrition should take care of at
  least 60 of their desired goal.
• Source Associated Press lthttp//biz.yahoo.com
  /apf/010208/verizon_jo_2.html

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Market Multiples
Copy and Paste Excel File
Source Quicken, Screen Thief
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Revenue Growth
Copy and Paste Excel File
Source Quicken, Screen Thief
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Net Income Growth
Copy and Paste Excel File
Source Quicken, Screen Thief
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Management Performance
Copy and Paste Excel File
Source Quicken, Screen Thief
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Debt Ratios
Copy and Paste Excel File
Source Quicken, Screen Thief
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Final Subsidiary Notes

• Incendiary Issues
• Data and Wireless services continue to grow,
  although both businesses saw growth decelerate in
  the most recent quarter.
• The companys operations continue to generate
  healthy cash flow, but margins are declining as
  capital spending for services like DSL
  accelerates.
• Verizon is fairly risky in macro terms because of
  all of the uncertainty in the telecom market and
  how its pieces will all fit together, but they
  are the best of the RBOCs based on cash flow
  multiples and is currently the best way for us to
  gain exposure to this industry.

Kevins brilliant mind
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Intrinsic Value CalculationsP/E Valuation Model

• Price/Earnings Per Share Method
• Justified P/E EPS1
• BEST CASE 20.0 3.20 60.60
• WORST CASE 17.0 3.10 52.70
• MOST LIKELY 19.0 3.15 59.85
• CURRENT PRICE 53.15

Justified P/E is based on an assessment of the
average ten year P/E and expectations of
companies future. Justified EPS is based on
consensus estimates from different sources such
as ValueLine, Zacks, Multex, and Quicken.
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Intrinsic Value CalculationsP/S Valuation Model

• Price/Sales Per Share Method
• Justified P/S SPS1
• BEST CASE 2.8 24.75 69.30
• WORST CASE 2.2 24.25 53.35
• MOST LIKELY 2.4 24.70 59.28
• CURRENT PRICE 53.15

Often, ValuLine is one of the best sources for
historic P/S figures. This information can also
be found on Microsoft Moneys site under the ten
year summary of financial ratios.
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Intrinsic Value CalculationsP/CF Valuation Model

• Price/Cash Flow Per Share Method
• Justified P/CFPS CFPS1
• BEST CASE 8.1 7.70 62.37
• WORST CASE 7.5 7.50 56.25
• MOST LIKELY 7.9 7.60 60.04
• CURRENT PRICE 53.15

Again, ValueLine and Microsoft Money tend to be
the two best sources for historical ratios.
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Recommendation

• BUY VZ from 50-55
• I really like VZ as I do NXTL, but for different
  reasons. VZ allows us to get the diversification
  into DSL, long-distance, and the local markets,
  while still keep some growth businesses like
  wireless and data, whereas I like NXTL as a niche
  player. I think they complement each other well
  and would both be good additions to our portfolio.

Kevins opinion. Serious investors are advised
to sell short.