A Vietnam War veteran, Ivan Seidenberg started his career as an assistant to a cable company splicer. From there, he rapidly rose through the ranks and became the CEO of NYNEX in 1994. Of course, the company eventually became Verizon (NYSE:VZ).
Now Seidenberg is stepping aside and is being replaced by Lowell McAdam, who was the company’s chief operating officer. The transition has been fairly smooth, and Seidenberg will remain as the chairman.
So does McAdam have the right stuff to get shareholders excited? To see, let’s take a look at the pros and cons of Verizon:
Pros
Solid infrastructure. Verizon has spent billions on creating a nationwide system to deliver high-quality communications. For example, its LTE network will provide next-generation capabilities to allow faster data transmissions, which will be key for smartphones. This certainly will be a huge competitive advantage.
There also is the FiOS (fiber-optic data) network, which allows for Internet, phone and television services. It cost a whopping $23 billion to create but now has 3.8 million customers.
Strong free cash flows. These have been muted for this year. But for the back half, they are likely to improve because of lower capital investments for its network. Thus, there will be more money for share buybacks and dividends.
New leadership. To find growth, it’s absolutely essential that Verizon focus on innovation. The good news is McAdam has been able to demonstrate that he can push new ideas. Keep in mind that he was the mastermind who crafted the deal with Google (NASDAQ:GOOG) to launch Android-based smartphones.
Cons
Labor. Because of its legacy phone business, Verizon must deal with a strong union. In fact, various contracts will expire Aug. 6, and the negotiations have been contentious. Might there be higher labor costs? A potential strike?
Competition. AT&T’s (NYSE:T) $39 billion merger with T-Mobile will drop Verizon to the No. 2 spot in the United States. True, it is far from clear-cut whether the deal will go through. But if it does, it will give AT&T more scale to compete against Verizon.
iPhone traction. Of course, there was tremendous excitement when Verizon got the rights to distribute the iPhone. However, since the launch in February, the results have been disappointing. In the latest quarter, Verizon sold only 2.3 million iPhones, which compares to sales of 3.6 million from AT&T.
Basically, it looks like consumers are waiting for the iPhone 5. But this may not hit the markets until the fall or even the first half of 2012.
Verdict
Verizon faces some tough challenges. For example, it must find ways to manage its large wireless joint venture partner, Vodaphone (NYSE:VOD). At the same time, Verizon needs to deal with the declines in its landline business (there still are 25 million phone connections).
But perhaps the biggest issue — at least for shareholders — will be the iPhone 5. Until this gets onto the market, there will likely be few catalysts to move the stock. As a result, the cons outweigh the pros on Verizon’s stock for now.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
