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Is Verizon a Good Investment?

Verizon Communications Inc. (NYSE:VZ) was up over 2% on the company’s 3Q earnings release. The company announced 3Q EPS of $0.64, meeting expectations and growing earnings 14% from last quarter. Verizon attributed its solid growth to new plans, namely their “Share Everything” plan.

In part, Verizon has Apple Inc. (NASDAQ:AAPL) to thank for its positive 3Q performance. The iPhone 5 launch helped push Verizon’s iPhone sales to over 3 million sold in 3Q. The Apple and Verizon partnership only came about in early 2011, and has since proven very positive for Verizon. Based on iPhone stats earlier this year, both Verizon and AT&T are big contributors to Apple’s iPhone sales, with each selling around 30% of total iPhone sales, while Apple sales are only around 15% directly. However, as both AT&T and Verizon have announced that they will limit data usage, Apple is making partnerships with some of the smaller wireless carriers, including Sprint Nextel Corporation (NYSE:S) and Virgin Mobile.


The supply constraints of the iPhone 5 likely limited Verizon’s total revenue potential, but the wireless carrier hopes to make this up in 4Q. Verizon also expects to continue to see strong sales of older model iPhones as price drops attract the customers not willing to pay for the higher priced iPhone 5. As well, the holiday season should further drive demand.

Sprint recently announced that Softbank Corp (PINK:SFTBF) had taken an interest in the company, to the tune of 70% ownership. Sprint is up over 10% this week on the news. Notable investor making out big on Sprint so far this year is David Einhorn. Einhorn had 3.7% of Greenlight Capital’s 2Q 13F portfolio invested in Sprint. Since the end of 2Q the company is up over 70%. Many believe that with a big backer like Softbank, Japan’s third largest mobile carrier, Sprint may finally be able to compete on a large scale with AT&T and Verizon—see why they might be right. Many investors have fled from Softbank on the news, pushing the stock down over 20% the last couple weeks. However, Softbank believes the cost saving synergies could be as high as $20 to $40 billion.

You cannot mention Verizon without immediately thinking of AT&T Inc. (NYSE:T). AT&T is expected to grow wireless revenue 4.4% in 2012, but will be limited in its ability to build out coverage and took a setback with the failed acquisition attempt of T-Mobile—see if AT&T is a good stock to buy. The company was a pioneer in leading smartphone adoption, namely being the first company to offer the iPhone and having an exclusive relationship with Apple, but the high level of penetration has strained AT&T’s network. Where Verizon has only seen insider sales this year, AT&T is a stable income stock that insiders love.

Both AT&T and Verizon have a high level of fund interest, including Seminole Capital, which is a top fund owner in each. During 2Q, Seminole took a new position in AT&T that made up almost 4% of the firm’s 2Q 13F portfolio, while for Verizon, Seminole upped their stake 140% to the point that the company was 4.4% of their 13F. Another notable investor, Adage Capital, who is the top fund owner by shares for both companies, decided to keep their stake stable in 2Q for AT&T, but found reason to increase their Verizon stake by 20%.

Although it is tough to go wrong if you choose either Verizon or AT&T, we believe that Verizon has the greatest growth prospects and is the leader in the spectrum battle. We do not agree with the fact that the two companies trade so closely, with Verizon up 14% year to date and AT&T up 19%, and both companies with betas around 0.5. We believe that this relationship should begin to separate in the future as it becomes clear that Verizon is industry leader. Driven by Verizon’s long-term prospects in wireless coverage, above that AT&T, we believe that the company will excel going forward and meet expectations of a 5-year CAGR in EPS of 10%.

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