Investors to Verizon: Keep Up the Good Work
A market hungry for good news is finding a 16 percent jump in Verizon Communications quarterly earnings impressive, an analyst told CNBC Thursday.
Verizon saw its stock rally by nearly 3 percent, a day after reporting a third quarter profit largely in line with analysts' expectations.
Still, Colby Synesael, an analyst at Cowen & Co, told CNBC's "Worldwide Exchange" that Verizon's ability to report higher margins on its wireless business was a solid feat, given the economics of the telecom's business relationship with Apple's wildly popular iPhone. As part of its agreement with Apple, Verizon is forced to partly subsidize new iPhone sales.
Pointing to a 50 percent margin in earnings before interest, taxes, depreciation and amortization (EBITDA), Synesael said that figure was "surprising because you'd think with the iPhone launching, particularly with the subsidies required for them sell that device, you'd think the margins would go down. We were expecting about 46 percent wireless EBITDA margins."
Last month, Apple launched a fifth version of the smartphone, whose sales topped five million in the first weekend.
In fact, much of Verizon's strength was derived from its wireless operations, the analyst noted. In the latest quarter Verizon Wireless, the No. 1 U.S. mobile provider, posted a 7.5 percent jump in quarterly service revenues to $ 16.2 billion. Meanwhile, it added nearly two million new subscribers.
"While the company does on a combined basis have about $10 billion at least as of last quarter, a significant portion of that is in the wireless business, " Synesael said, adding that he'd be watching to see how much of that money made its way back to the corporate parent.
Along with an attractive dividend payment, Verizon's stock is now trading at about 16 times its 2013 earnings, the analyst noted, which is well above the average multiple at which it's traded in recent years.
The lofty price of its stock may put pressure on the company to show it can deliver on results independent of iPhone sales, Synesael said.
"Certainly investors are certainly looking past the subsidies and what that will do to the margins at least in the short term. Certainly there's a bigger focus on profitability at Verizon over the past year or two, that's really going to be a focus for investors over the next year or two."
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Cowen & Co has a business/banking relationship with Verizon, but Synesael does not hold any of the company's stock.