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Morningstar | Verizon Reported Soft 4Q Revenue, but Our FVE Remains $58

Verizon’s recent strategic choices haven’t been flawless, but the firm has largely remained on the right track, in our view. With the vast majority of its efforts focused on network quality, we believe Verizon has protected its core competitive advantages while maintaining solid returns on capital, especially in the wireless business. In short, we like Verizon’s telecom focus, which should maximize its strengths in the areas it can control while limiting exposure to the rapid changes across the media landscape.Verizon has long prided itself on network quality, investing consistently in both wireless and fixed-line technology. The firm has built its marketing reputation around these networks, attracting a large and loyal customer base. In the wireless business, the firm holds roughly 40% of the postpaid phone market, about a third greater than even AT&T. Leading scale enables Verizon to generate the highest margins and returns on capital in the industry. While the proposed merger of T-Mobile and Sprint would narrow this scale advantage somewhat, Verizon would remain far larger than the combined firm. We also expect this merger, if approved, will improve the industry’s structure, leaving three players with little incentive to price irrationally in search of short-term market share gains.Verizon has, astutely in our view, divested much of its fixed-line footprint over the past decade, leaving primarily operations in the Northeast. Around three fourths of its remaining network has been overbuilt with fiber optics (its Fios system), replacing traditional copper wire. The high cost of this network build has produced weak profitability in the fixed-line business, but we expect this asset will be increasingly valuable in serving wireless needs in this densely populated region. Verizon has undertaken a major fiber expansion project recently, which promises to remake Fios to serve wireless and business customers while also adding capacity in other major markets around the U.S. This undertaking should support the firm’s effort to lead the industry in 5G technology deployment and enable it to serve new customers, providing strategic benefits and new avenues for growth.