Verizon: Canaccord Ups to Buy on Wireless, Wireline Prospects

Shares of Verizon Communications (VZ) are down 2 cents at $42.91 despite an upgrade to Buy from Hold by Canaccord Genuity’s Greg Miller, with a $50 price target, following the company’s Q4 report yesterday that included higher-than-expected revenue on activations of smartphones, including Apple‘s (AAPL) iPhone, but lower-than-expected profit per share.

Wireless profit margin has the prospect of improving by 2.5 percentage points this year as the company makes the most of its lead in “long term evolution,” or LTE, broadband wireless, writes Miller:

With subscriber momentum clearly in its favor and with a big lead in its 4G deployment, we believe Verizon�s wireless business is now stronger than ever before and expect 2013 wireless margins to be a record-setting 49-50% or more [...]�With no expansion to 3G capacity expected in 2013 and close to 50% of all wireless data traffic on LTE network that is significantly more cost efficient, we believe the company could further reduce cost of service even as the data traffic continues to grow. For 2013, we now expect 140bps in incremental benefits to margins from cost of service.�Second, despite the dilution to wireless margins in Q4/12, we expect the impact to be temporary and device subsidies to be a source of margin expansion on a full year basis. We believe this is primarily driven by less aggressive device promotions, longer upgrade cycle and the potential of lower priced smartphones, as Verizon increasingly focuses more on profitability than on mere subscriber growth. �

Wireline, the perpetual source of discomfort, could also look a little better this year, he thinks, lending support for a higher valuation:

Further, although we are officially forecasting only flat 2013 wireline revenue growth with continued margin expansion, we believe potential upside exists with less pressures from international wholesale and comparisons to declining CPE (equipment) revenues. Should the global economy improve, bolstering enterprise revenues, Verizon would then become a prime beneficiary. With improving cash flow trends from greater cap-ex efficiencies and improving margins, we believe the company could put to work its authorized 100M share repurchase program. Accordingly, we believe it is highly probable that the stock will trade above its historic range and in line with more recent highs at 6.5x forward estimated EBITDA.