Verizon Communications Inc. (VZ): Mergers, Buyouts and Earnings, Oh My!

Verizon Communications Inc. (NYSE:VZ) is generating a lot of noise right now. There’s its impending acquisition of Yahoo! Inc. (NASDAQ:YHOO). There are whispers that it might try to outbid AT&T Inc. (NYSE:T) in a race to own Straight Path Communications Inc (NYSEMKT:STRP). Now, apparently, a merger with Walt Disney Co (NYSE:DIS) or CBS Corporation (NYSE:CBS) is on the table.

Verizon Communications Inc. (VZ): Mergers, Buyouts and Earnings, Oh My!

So even if you’re a VZ stock holder, you could be forgiven if you didn’t realize that Verizon earnings for the first quarter will be reported Thursday morning.

Consider this your gentle reminder.

Also consider it a primer for current and would-be owners of Verizon stock. The company clearly has a lot on its plate right now, and it’s going to take a very good roadmap to navigate the rest of the year.

Verizon Earnings Preview

As of the most recent look, telecom giant Verizon is expected to report first-quarter income of 97 cents per share on sales of $30.57 billion. Both are down from year-ago levels, when the company turned $32.17 billion worth of revenue into earnings of $1.06 per share.

Those tepid expectations are only a microcosm of the results Verizon has posted over the course of the past four quarters, when growth hit a wall against a backdrop of market saturation… in step with intense competition. That was shortly after Sprint Corp (NYSE:S) introduced its “cut your bill in half” promotion, which was largely in response to a similarly generous offer from T-Mobile US Inc (NASDAQ:TMUS).

A price war ensued, taking a toll on all the combatants, including Verizon.

Life hasn’t been so great for Verizon stock owners of late either. Indeed, VZ is presently where it was trading in April 2013, when the 4G war began in earnest.

Weekly Chart of VZ Stock
Click to Enlarge

The game simply didn’t become a cutthroat one until last year, when all the key names in the business found themselves willing to sacrifice a piece of their top and bottom lines to win and keep market share.

Shareholders are still struggling to decide if it has been worth it. While the dividend yield of 4.7% is solid, there’s not been any capital appreciation — and increase in the price of Verizon stock — for a long, long time.

3 Things to Watch

In most cases, initiatives and details matter to investors because they clearly impact the bottom line. The link between Verizon’s initiatives and the company’s bottom line, though, isn’t quite as evident. That is to say, Verizon’s results may or may not actually have to improve for the stock to start making forward progress again — the market may only need to be encouraged by the rhetoric for VZ stock to move back into a bullish mode.

To that end, there are three key talking points all interested investors need to get a firm grip on before, during, and after the Verizon quarterly report on Thursday. They may or may not come up during the conference call, but they are the key drivers at this time and could help shape the post-announcement response VZ stock dishes out. In no particular order…

Yahoo acquisition: It’s the 800 pound gorilla in the room.

Never say never, but as of the latest reports, the deal is still going through — just for $350 million less than initially offered by Verizon, to account for some missteps Yahoo made years ago. Even then, though, while the web giant managed to top last quarter’s profit and revenue estimates, Yahoo just reported another year-over-year decline of both measures. Verizon clearly has some work to do to stop the bleeding.

Technology plan: There are a variety of ways to connect a cell phone to a network. In addition to the traditional link to a tower using a long-range radio wave, short-range wi-fi signals can do some of that work. In some cases, the use of physical fiber-optic cables can supply part of the connection. In all cases, though, at some point Verizon (like all other carriers) will have to use FCC-licensed radio waves.

That’s why Verizon’s failure to win any new spectrum in the most recent FCC auction was a concern for shareholders. Yet, Verizon also just inked a deal with Corning Incorporated (NYSE:GLW), agreeing to purchase at least $1.0 billion worth of fiberoptic cable from the company over the course of the coming three years.

The lack of a new spectrum purchase and the investment in physical lines speaks volumes about its infrastructure plans. Verizon needs to make sure it’s moving down the ideal infrastructure path though.

Acquisition plan: Finally, though there’s a rumor floating in the market’s ether that Verizon wants to make a bid for Straight Path before AT&T seals the deal, that’s only one of a large lineup of possible pairings that could prepare Verizon for the future. Ditto for the Yahoo deal.

There’s a bigger paradigm shift underway though — media and communications companies are becoming one and the same. Verizon needs to find a way to meld the two if it’s going to compete with the likes of AT&T, which will soon meld with Time Warner Inc (NYSE:TWX) to further blur the lines between media and messenger.

The question is, what’s Verizon’s strategy to do the same? We might have an answer in the form of CEO’s statements that it would be open to merging with Disney, CBS or Comcast Corporation (NASDAQ:CMCSA).

“If (Comcast CEO Brian Roberts) came knocking on the door, I’d have a discussion with him about it,” McAdam told Bloomberg. “But I’d also tell you there isn’t much that I wouldn’t have a discussion around if somebody came and said ‘Here’s a compelling reason why we ought to put the businesses together.”

Bottom Line for VZ Stock

For the record, Verizon missed its prior quarter’s earnings estimate … the first miss since the last quarter of 2014. It’s conceivable analysts chalked it up to bad luck and didn’t consider the possibility that it could happen again.

On the other hand, the lowered year-over-year EPS expectation is a tacit acknowledgement that not everything is ideal.

Whatever the case, it’s up to Verizon to prove its value to the market here. Nobody who owns or is interested in buying VZ stock is giving the company the benefit of the doubt going into its earnings report.

As of this writing, James Brumley was long T.

Article printed from InvestorPlace Media,

©2021 InvestorPlace Media, LLC