Wednesday, September 16, 2009

Verizon (NYSE:VZ): Downgraded at UBS

UBS is downgrading Verizon (NYSE:VZ) to Hold from Buy:

- Lowering our EPS estimates below consensus Based on guidance provided at a recent investor conference, we are lowering our EPS estimate on VZ to $2.42 in 2009 (consensus at $2.53) from $2.52 previously, equating to a 4.7% annual decline. For 2010, our EPS estimate goes to $2.45 from $2.70, putting us meaningfully below consensus at $2.64.

- Wireline fundamentals still deteriorating We believe the business market continues to worsen and is unlikely to improve until 2010. We also expect a slowdown in consumer metrics in 3Q. Combined with slower than expected progress on headcount reductions, we estimate this should drive a 170 bp sequential decline in wireline margins, leading to a 21% annual decline in wireline EBITDA.

- Cracks beginning to appear in wireless We no longer expect wireless ARPU to grow in 3Q after the ~1% growth in 1H as pressure on voice offsets growth in data. We believe there could be further downside to ARPU given the iPhone’s ability to attract high-end subs, S/T- Mobile’s attempts to turn their businesses and increasingly aggressive prepaid plans. As a result, projected services revenue growth slows to 6.8% from 9.0% in 2Q. We have slightly lowered wireless EBITDA margins in 3QE to 45.8% (prev.46.2%).

- Valuation: Downgrading to Neutral from Buy We think VZ will be range-bound as the market absorbs the lower EPS outlook for2009-10. Given these changes, we are lowering our 12-month price target to $32 from $34 per share (DCF based using 8% WACC; 2% FCF growth in perpetuity).

Action: VZ is not a stock that would make wild moves, but I think this call should provide a nice trading oppty. Telco sector has gotten a lot of attention recently with S, PCS and LEAP all being mentioned as takeover candidates. While consolidation would be positive for the sector and VZ, it also highlights slowing growth. And this is also why UBS is downgrading.

New 2010 EPS estimate from UBS is well below consensus and also below expectations for current year. With general expectations of improving economic conditions, y/y decline should send some investors looking for better opportunities.

VZ probably will not gap down more than 1%, but I expect the shares to see constant selling pressure throughout the day. So my plan would be shorting above $30.60 early on and covering around $30.

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