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Verizon








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Table of Contents

1. Abstract

2. History of the company and its stock

3. Analysis of financial statements

4. Estimating required rate of return and expected rate of return

5. Estimating intrinsic value of stock

6. Other measures and analysis

7. Valuation of operations

8. Estimating total corporate value of equity

10.Conclusion

11. Appendixes







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Verizon Financial Abstract
Abstract
The purpose of this report is to arm you with all the pertinent information about Verizon in order to
make a sound investment decision. In this report, I will provide a brief overview of the company, its
financial health, competitive analysis and recommendations.
History of the company and its stock

Verizon Communication is a large US-based Telecom Company with two service offerings: Wireless and
Wireline. The company was founded in 2000 through a merger with Bell Atlantic and GTE and today
employs more than 170,000 employees. Verizon Wireless was created as a joint venture with Vodafone,
a European telecom company with Verizon owning 55% of the company. In Q4 of 2013, Verizon agreed
to buy out Vodafones 45% ownership in the company, giving Verizon 100% ownership of Wireless. This
was an important milestone for the company because the Wireless division contributes to 65% of the
total companys revenue generated and it provides Verizon control over its primary business unit.
Wireless
The Wireless division provides mobile and data services to consumers and business customers. Verizon
Wireless has been ranked as the number one network mobile carrier in the US for 2012 and 2013 with
more than 102 million customers accounts in the United States. Verizon Wireless has the largest 4G LTE
network covering in excess of 500 markets and 97% of the United States population. The companys
marketing strategy focuses on postpaid annual contracts and a data usage pricing-based model. Verizon
Wireless positions itself as a valued brand that focuses on its network quality and strengths.
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Wireline
The companys Wireline division focuses on phone services, internet access and television services for
residential and small business customers through its copper or fiber optic cables technology. The
company launched its Fios service in 2005 with its copper wire technology and has reached nearly 16
million customers accounts for TV, Internet and home connections
Analysis of financial statements

After reviewing Verizons financial statements for the three most recent years, it is evident that the
company has shown steady financial health and profitability. Verizon has consistently been able to
generate a steady cash flow, positive net income and asset growth. Total revenue grew 4% from
$110,875 billion in 2011 to $115,846 billion in 2012 and $120,550 billion in 2013. Although revenue
grew marginally, net income increased by a drastic 123% in 2013 from $10,557 billion to $23,547 billion.
This is a clear indication that Verizon has been able to control costs in order to increase the bottom line.
Their COGS remained fairly flat annually and only increased slightly in 2012 by 1% and decreased 3% in
2013.
The companys balance sheet shows that Verizon continues to invest in assets to strengthen its position
as a technology company. Customer churn rate remained fairly flat for the past two years at 1.10% in
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$105,000
$110,000
$115,000
$120,000
$125,000
2011 2012 2013
Verizon Earnings:
Revenue & Net Income Trend(Millions)
Services Revenue Net Income
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2012 and 1.12% in 2013. This is a strong indicator that the brand maintains its customer base in a
competitive environment. In 2013, capital expenditures increased 14.5% with the focus on enhancing
the network quality which is evident that the company is focus on growing assets. The companys total
assets increased by 22% more in 2013 than they did the previous year.
Cash from operations increased significantly in 2013 by 23% to $38,818 billion from $31,486 billion in
2012. Total cash on hand at the end of the period in 2013 was $53.3 billion, a 1,631% increase year-
over-year and mostly due from cash generated through bonds and equity financing for the Vodafone
acquisition. Verizon borrowed $49 billion to fund the acquisition, and this contributed to the large
increase of cash in 2013. Although this may seem risky, the acquisition now allows Verizon to have
access to full profitability of wireless which was previously shared with Vodafone.
Financial Ratios Analysis
In 2013, Verizon generated a 20% return on sales, a 114% increase from 2012. For 2011 and 2012,
return on sales remained fairly flat at 9% respectively. The companys operating profit margin in 2013
was 27% which also was a 113% increase over the previous year. In 2011 and 2012, operating margins
were 12% and 11% respectively. Although Verizons equity ratio decreased 8% in 2013 to 35% from 38%
in 2012, which means that the company acquired more debt, the companys return on equity increased
significantly by 100% in 2013 to 25% from 12.3% in 2012 which offset the slight decline in the overall
equity ratio. Finally, the companys financial leverage ratio increased 9% year-over-year from 2.63 in
2012 to 2.87 in 2013. While this can indicate too much risk exposure, the steady cash flow and cash on
hand over the past three years enabled them to hedge against this exposure.


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The company has been able to generate a positive return on its assets the past three years with 2013
showing a significant increase of 83% compared to the previous two years of 4.7% in 2012 and 4.4% in
2011.
Competitive and Industry Analyses
Verizon has consistently outperformed the industry average for key financial figures for the last two years.
As illustrated below, Verizons operating margin of 26.5% was 89% higher than the industry average of
14%. The company average return on sales of 19.5% for the last two years was 30% higher than the
industry average. The company return on equity ratio of 24.7% slightly underperformed the telecom
industry average of 26% by .05% but return on assets outperformed the industry averaged by 72%.
2011 2012 2013
ROE 11.9% 12.3% 24.7%
ROS 9.2% 9.1% 19.5%
ROA 4.4% 4.7% 8.6%
Equity Ratio 37.3% 38.0% 34.8%
33.0%
33.5%
34.0%
34.5%
35.0%
35.5%
36.0%
36.5%
37.0%
37.5%
38.0%
38.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
P
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Verizon Financial Ratios
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Sprint
When comparing Verizon to Sprint, Sprint has struggled tremendously over the last two years. Sprints
network covers only 300 US cities versus Verizons 500, giving Verizon a clear edge in network coverage.
Sprint customers base of 46 million compared to Verizons 102 million. Sprint has a higher average
customer churn rate for the last two years at 2.7% against Verizons 1.1%. The company is clearly unable
to generate revenue growth as service revenue remained fairly flat at $35 billion in 2013, a .4% increase
over 2012. The company cash flow from operations decreased in 2013 by 12.9% contributing to the
companys struggles. Sprint continues to increase assets but mostly through borrowing funds due to its
inability to generate cash flow from operations. During the same time period, Verizon posted revenue
growth of 4% annually and cash from operations increased 23% from 2012 to 2013. Sprint has had two
consecutive years with net losses: $4.3 billion in 2012 and $4.1 billion in 2013, unlike Verizon which
posted gains of 9% and 20% respectively. When analyzing key financial ratios for both companies, Sprint
posted a return on sales of -12.3% in 2012 and -11.67% in 2013 while Verizon gained 9% in 2012 and
19.5% in 2013. Again negative figures, Sprint posted a return on equity of -12.3% in 2012 and -6.52% in
2013 while Verizon showed gains of 12.3% in 2012 and 24.7% in 2013. Spring return on assets was also
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RE V GROWT H GROS S PROF I T
MARGI N
OPE RAT I NG
I NCOME
MARGI N
ROS ROE ROA E QUI T Y RAT I O
VERIZON FINANCIAL RATIOS VS. INDUSTRY
AVERAGES:
2012 - 2013
VZ Industry
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negative in 2012 at -1.5% and -2.17% loss in 2012, and Verizon had a 4.7% gain in 2012 and 8.6% in
2013.

T-Mobile
When comparing Verizon to T-Mobile, T-Mobile experienced tremendous growth in 2013 as revenue
grew 24% to $24.4 billion. However, this is still 80% less revenue than Verizon. T-Mobiles network
covers only 166 US cities and Verizon 500, giving Verizon a significant edge in network coverage. T-
Mobile customer base of 37 million is 176% less than Verizons 102 million. T-Mobile has a higher
average customer churn rates for the last two years at 3.5% vs. Verizon 1.1%. Although T-Mobile saw a
positive turnaround in 2013 from posting a $7.3 billion net loss in 2012 to $35 million net income, it was
mostly at the expense of profitability. The companys return on sales in 2013 ratio was .14% while
Verizons was 19.5%. The year prior, T-Mobile posted a -37% return on sale loss as compared to
Verizons 9.1% gain. T-Mobiles average return on equity in 2012 was at -120%, but grew to a marginally
positive figure of .25% in 2013. T-Mobile saw an 8% decline in cash from operations, however their cash
from financing activities increased significantly by 6999% to $5.4 billion in 2013, largely due to debt they
acquired in 2013. With its inability to generate positive annual growth in cash from operations growth
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RE V GROWT H GROS S PROF I T
MARGI N
OPE RAT I NG
I NCOME
MARGI N
ROS ROE ROA E QUI T Y RAT I O
VERI ZON VS. SPRI NT FI NANCI AL RATI OS:
2012 - 2013 AVERAGE
VZ Sprint
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and its subpar return on sale, T-Mobiles financial health seems extremely uncertain.

AT&T
AT&T is Verizons closest rival in the industry. AT&T and Verizon have similar marketing strategies
focusing on postpaid and data usage pricing models. The only differential between the two brands is
their network coverage and strengths. AT&Ts network covers 300 US cities versus Verizons 500. AT&T
has 80 million customers based against Verizons 102 million, giving Verizon the edge. AT&T had a higher
average customer churn rates the last two years at 1.3% while Verizon claimed 1.1%. AT&T posted $128
billion in service revenue in 2013, a 1% increase compared to Verizons $120 billion which was a 4%
increase. When comparing AT&Ts profitability for the last two years, their average operating income
margin was 7% while Verizon had 26.5%, or an 89% variance. AT&Ts average return on sales for the
most recent two-year period was 14% compared to Verizon at 19.5%, a 39% variance. AT&Ts average
return-on equity from 2012 to 2013 was 20% vs. Verizon 24%.7, a 24% variance. Return on assets for the
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RE V GROWT H GROS S PROF I T
MARGI N
OPE RAT I NG
I NCOME
MARGI N
ROS ROE ROA E QUI T Y RAT I O
VERI ZON VS. T-MOBI LE FI NANCI AL RATI OS:
2012 - 2013 AVERAGE
VZ T-Mobile
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same period for AT&T was 7% compared to Verizons 8.6%, a 30% variance.

Estimating required rate of return and expected rate of return
While estimating the Required Rate of Return and Expected Rate of Return we found that the
expected rate of return of 7.05% was greater than the required rate of return 6.95%. Therefore
we decided that Verizon would be a good investment.
RRR= 2.99% + 0.38 (13.41% - 2.99%) = 6.95%
D1 = 2.12 * (1+2.8%) = 2.18
D2 = 2.18 * (1+2.8%) = 2.24
ERR= 2.18/51.28 + 2.8 = 7.05%
Estimating intrinsic value of stock
Typically the best time to invest in a stock is when the market price of the stock is below its
intrinsic value. This will reduce your investment risk as an investor and increase your return.
Through the analysis it was found that the intrinsic value of stock to be $ 52.72, and its current
value is $51.28. By calculating P1 we got (2.24 / (7.05% 2.8%)) = 52.72. We then used this
value to find the Capital Gain yield (CGY) of 2.80% = (52.72 51.28)/51.28. Since the intrinsic
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RE V GROWT H GROS S PROF I T
MARGI N
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MARGI N
ROS ROE ROA E QUI T Y RAT I O
VERI ZON VS. AT&T FI NANCI AL RATI OS:
2012 - 2013 AVERAGE
VZ AT &T
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value of the stock is greater than the market value, so the decision would be to invest in
Verizon.
Other measures and analysis

Verizon Wireless P/E ratio has been on a constant rise for more than five years, concerning the
years of 2011 through 2013 the P/E Ratio has increased by at least 20 percent from 2011 to
2012 yet slowed considerably in 2013. This slowing of price is alarming yet Verizon still out
preforms it leading competitor and the industry average for that period and to date.

Valuation of operations

Verizon Cash Flows (millions)
Year 11 $13,362
Year 12 $3,093
Year 13 - $53,528
Growth Rate 2012 - $13,362-$3,093/ $13,362 = 77%
Growth Rate 2013 -$53,528-$3,093/$3,093 = 16%



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Verizons WACC
WACC Formula = Cost of Equity (CAPM) * Common Equity + (Cost of Debt) * Total Debt
WACC 2011 =
WACC 2012 =
WACC 2013 =



Estimating total corporate value of equity

We came up with the total Corporate Value and Value of Equity by looking
at the number of outstanding shares and current price of stock of a given
date. With this information, we multiplied the number of shares * the
current price of stock to get the market value equity of 2.13 E
11
.

Verizon Communications (NYSE: VZ)


Number of Shares Outstanding (7.28.14) - 4.14 Billion


Current Price of Stock (7.28.14) - 51.58



Market Value of Equity = Number of Shares Outstanding * Current Price of Stock


= 4,140,000,000 * 51.58


= 2.135412E
11






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(as of 12/31/13 - dollars in millions)

Cash & Cash Equivalents 53,528
Total Equity 95,416
Investments 3,432


Conclusion
Recommendation
The four keys financial drivers I look for when investing in a company are:
The companys ability to generate cash
The ability to generate profit
Evidence of consistent annual growth
How it utilizes assets to generate profit
35%
63%
2%
Verizon Cmmunications
Market Value of Equity
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Verizon financial statements indicate that the company has met all four criteria. Verizon generated
growth of 23% and 6% in cash from operations in 2013 and 2012. More importantly, Verizon has solid
cash on hand annually, which is critical for a future outlook. Verizons operating income margin of 26.5%
outperformed the industrys 14%. Their return on sales average of 19.5% for the last two years
outperformed the industry average and its closest competitors to boot. Its return on equity ratio and
return on assets of 24.5% and 8.6% outperformed its competitors. Also the companys expected rate of
return of 7.05% was greater than the required rate of return 6.95%. It was also found that Verizons
stock intrinsic value was higher than its market value, which indicates that Verizon is a great investment.
The company continues to invest in assets to strengthen its position as an industry leader. Although
Verizon acquired a significant debt of $49 billion in 2013, the acquisition now provides Verizon 100% of
its primary assets in the wireless business units. This move now enables Verizon access to 100% of the
profitability of its primary business unit.
Verizon continues to have network superiority over its competitors by covering 97% of the United States
geographically. The customer churn rate of 1.1% is the lowest as compared to its closest competitor,
AT&T, indicating that Verizon is keeping its customer base. It is apparent that Verizon will continue to
lead the industry specifically for Wireless services. Based on my analysis, Verizon is financially healthy
and has bright future. Thus, I highly recommend it as an investment-grade company that will yield a
higher return on your investment.




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Appendix A

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Appendix B