Paulson & Co. buy a new stake in Verizon Communications in 1Q14

Market Realist

Must-know: Paulson & Co.'s important positions in 1Q14 (Part 2 of 8)

(Continued from Part 1)

Paulson & Co. and Verizon Communications

John Paulson’s Paulson & Co. started new positions in Verizon Communications Inc. (VZ), CBS Corp. (CBS), and Valeant Pharmaceuticals (VRX) and upped its positions in Cobalt International Energy (CIE) and American Airlines Group (AAL). Notable position decreases were Family Dollar Stores (FDO) and Freeport-McMoRan Copper (FCX).

Paulson took a new position in Verizon Communications (VZ) last quarter. The position accounts for 2.04% of Paulson’s $20 billion portfolio. Hedge funds owned by Berkshire Hathaway and Dan Loeb also took positions in Verizon last quarter.

Verizon is one of the world’s leading providers of voice, data, and video services and solutions on wireless and wireline networks that are designed to meet customers’ demand for mobility, reliable network connectivity, security, and control. Its wireless business, operating as Verizon Wireless, provides voice and data services and equipment sales across the United States. Verizon’s wireline business provides consumer, business, and government customers with communications products and services, including broadband data and video services, network access, voice, long distance, and other communications products and services, and also owns and operates one of the most expansive end-to-end global Internet protocol (IP) networks.

The telecom sector is undergoing a consolidation, with Sprint (S) owner SoftBank (SFTBF) in talks to acquire T-Mobile (TMUS) and AT&T announcing plans to buy leading U.S. satellite operator DirecTV. Verizon CEO Lowell McAdam recently ended speculation by saying the company wasn’t interested in acquiring satellite operator Dish Network.

The company is currently focusing on the higher-margin and growing areas of its business such as wireless data, wireline data, and strategic services, including cloud computing services. The company organizes its service and product offerings by the primary customers targeted by mass markets, global enterprise, and global wholesale.

Verizon recently signed a “paid peering” deal with Netflix under which the latter will pay Verizon for improved streaming video service to customers. It also acquired Intel Media, the digital TV division of the chip maker Intel, in January to accelerate the availability of next-generation video services, both integrated with Verizon’s FiOS fiber-optic networks and delivered “over the top” to any device. The release said Intel’s OnCue Cloud TV platform “will help Verizon bring next-generation video services to audiences who increasingly expect to view content when, where and how they want it.”

In February, Verizon Communications completed the acquisition of Vodafone’s 45% indirect interest in Verizon Wireless in a transaction valued at approximately $130 billion. The consideration paid was primarily comprised of cash of approximately $58.89 billion and Verizon common stock with a value of approximately $61.3 billion. Plus, Verizon sold its 23% interest in Vodafone Italy for $3.5 billion, providing Vodafone with full ownership of Vodafone Italy.

Verizon’s 1Q 2014 earnings came below analyst estimates. On an adjusted basis (non-GAAP), Verizon reported a 23.5% increase in EPS to $0.84 in first-quarter 2014, compared to $0.68 per share in first-quarter 2013. Driven by wireless and FiOS services, total operating revenues in first-quarter 2014 were $30.8 billion, a 4.8% increase compared to first-quarter 2013 and the company’s highest quarterly growth rate in the past five quarters. FiOS, which is Verizon’s high-speed Internet data products, represented approximately 74% of consumer retail revenue in 1Q 2014.

Wireless total revenues were $20.9 billion in first-quarter 2014, up 6.9% year-over-year, primarily driven by higher retail postpaid service revenue as well as the continued increase in penetration of 4G LTE smartphones and tablets through Verizon’s More Everything plans. Wireline business revenues declined 0.4% as a result of a decline in core customer premise equipment revenues and traditional voice revenues. Verizon noted that its Enterprise customers continue to focus more on improving their cost structure as opposed to investing for growth, which is creating revenue pressure for the company. To compensate for the shrinking market for traditional voice service, Verizon said it’s continuing to build its Wireline segment around data, video, and advanced business services—where demand for reliable high-speed connections is growing.

Verizon expects consolidated top-line growth of 4% and adjusted consolidated EBITDA margin expansion in 2014, with positive contributions to profitable growth from both wireless and wireline.

The company is also creating shareholder value and made $5.9 billion in cash dividend payments in 2013. It declared a quarterly dividend of $0.53, representing a yield of 4.31%. Verizon’s board also authorized a buyback of up to 100 million shares of its common stock. Under the previous program, which terminated on February 28, 2014, Verizon purchased 3.5 million shares.

Continue to Part 3

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