Zacks Analyst Blog Highlights: Verizon Communications, AT&T Inc., Apple, Sprint Nextel and EMC

News provided by

Jan 25, 2011, 10:34 ET

CHICAGO, Jan. 25, 2011 /PRNewswire/ -- Zacks.com Analyst Blog features: Verizon Communications (NYSE: VZ), AT&T Inc. (NYSE: T), Apple Inc. (Nasdaq: AAPL), Sprint Nextel Corp. (NYSE: S) and EMC Corp. (NYSE: EMC).

(Logo: http://photos.prnewswire.com/prnh/20101027/ZIRLOGO)

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=4579

Here are highlights from Monday's Analyst Blog:

Earnings Preview: Verizon

Verizon Communications (NYSE: VZ), the second largest U.S. phone company, is slated to release its fourth quarter and fiscal 21010 earnings results on January 25, 2011, before the opening bell. The current Zacks Consensus Estimate for the fourth quarter is 55 cents, representing a 1.58% annualized growth.

Verzion had an average of 1.82% positive earnings surprise in the last four quarters. Hence, we will not be surprised if the carrier beats expectations in the fourth quarter on continuous broadband network investment, strong wireless and FiOS services, and increasing smartphones penetration.

On its third quarter conference call, Verizon has not released any financial forecast for the fourth quarter. For 2010, the company targets capital expenditure in the range of $16.8 billion to $17.2 billion.

Yesterday, Verizon announced that it will incur a non-cash pre-tax charge of $600 million in fiscal 2010 related to a change in pension accounting. This charge will reduce earnings per share by a penny in each quarter of 2010, including fourth quarter earnings. This move is similar to that of its largest rival AT&T Inc. (NYSE: T) announced last week.

Despite these charges, Verizon stated that the company can achieve the upper end of its earnings per share expectation of $1.05 to $1.10 for the second half of 2010. The $600 million charge stems from the reduction in the pension discount rate to 5.75% from 6.25%, partially offset by higher-than-expected return on assets, favorable health care trends and other costs.

Verizon has changed its method of recognizing actual gains and losses for pension and other post-retirement benefits in order to improve transparency in its financial reporting. According to the company, these gains and losses will now be recognized in the year in which they are incurred, instead of amortizing them over several years.

Third Quarter Flashback

Verizon reported third quarter adjusted earnings per share of 56 cents surpassing the Zacks Consensus Estimate by 2 cents and the year-ago quarter's earnings of 41 cents, driven by continued strength in Wireless, FiOs and strategic business services.

Revenues improved slightly driven by Wireless revenue on lower churn (customer switch) and higher data revenues. However, Verizon's subscriber growth plunged as it struggled to compete with AT&T in the smartphone market.

Wireline revenue remained under pressure due to persistent erosion of access lines. FiOS services remain strong across all markets with the penetration rate of both FiOS Internet and FiOS TV reaching approximately 31% and 27.2%, respectively.

During the first nine months of 2010, Verizon's cash and cash equivalents increased to $5.4 billion from $1.2 billion in the year-ago period. Debt-to-equity ratio declined to 58.4% from 59.3% in the year-ago period.

Agreement of Analysts

Analysts covering Verizon have not made any revisions to their earnings estimate either in the last seven days or last 30 days for the fourth quarter. For fiscal 2010, one analyst out of 26 revised the estimate downward indicating its concern regarding persistent erosion in access lines and the slowdown in post-paid subscriber growth.

Though Verizon Wireless is the largest U.S. wireless carrier with 93.2 million subscribers at the end of September 2010, it has been losing market share to AT&T's iPhone exclusivity.

Verizon will start selling Apple Inc.'s (Nasdaq: AAPL) iPhone from February 10, which will mark the end of exclusivity that AT&T iPhone has been enjoying since 2007. The company also started deploying its high-speed fourth generation Long-Term Evolution (4G LTE) network at the end of 2010 with average download speed more than five-times faster than the company's third generation (3G) network.

In addition, Verizon is expected to offer new handsets and devices that support 4G network in 2011. These offerings will strengthen Verizon's position with respect to Sprint Nextel Corp. (S), the first to launch handsets on its nationwide 4G service in 2010.

With respect to the Wireline division, Verizon focuses on gaining market share through the deployment of service offerings (FiOS Internet and FiOS TV), including expansion of voice-over-Internet protocol (VoIP) and international Ethernet capabilities, the introduction of video and Web-based conferencing capabilities and enhancements to the virtual private network portfolio.

Magnitude - Consensus Estimate Trend

The magnitude of revisions for the fourth quarter and fiscal 2010 has been static at 55 cents and $2.24, respectively, over the last 7 days as well as 30 days. The Zacks Consensus Estimate for 2010 reflects a decline of 6.68% year over year.

Although Verizon continues to expand its 3G wireless and wireline FiOS network footprint, returns from investments in these businesses are highly uncertain. Further, persistent erosion in access lines continues to hurt wireline revenues and margins. High promotional and restructuring expenses may also drag earnings and margins going forward.

Our Analysis

We expect Verzion's growth prospects to be strong driven by new customers, higher smartphone adoption, 4G LTE network and the sale of iPhones and mobile broadband services, which will lead to improved revenue growth.

A healthy balance sheet and strong commitment to shareholder return make the stock more attractive for income-oriented investors. However, persistent erosion in access lines, high promotional and restructuring expenses, and intense competition from cable companies and other alternative services providers may be the downside.

We are currently recommending our long-term Neutral rating on Verizon supported by the Zacks # 3 Rank (Hold).

Earnings Preview: EMC Corp.

EMC Corp. (NYSE: EMC) is slated to release its fourth quarter 2010 earnings before the market opens on January 25. EMC holds a leadership position in the storage hardware and software segment and is a leading provider of data storage systems.

Quarter Ahead

EMC did not provide any quarterly guidance during its third quarter earnings call, but provided an upbeat guidance for full fiscal 2010.

According to the Zacks Consensus, earnings per share (EPS) are expected to be 35 cents for the fourth quarter of 2010. This is an increase of 40% from the year-ago quarter. The projected EPS includes stock-based compensation but excludes one-time charges.

EMC expects fiscal 2010 revenues of $16.9 billion. Management does not expect any negative currency impact on 2010 revenues. EMC issued a non-GAAP EPS outlook of $1.25 for fiscal 2010.

For 2010, consolidated restructuring and acquisition-related charges, stock-based compensation expense, and intangible asset amortization are expected to be 2 cents, 23 cents and 9 cents per share, respectively.

For the full year, non-GAAP operating income is expected to be 21% to 22% of revenues. The non-GAAP income tax rate is expected to be 22%. Non-operating expense, which includes investment income, interest expense, and other expense, is expected to be $80 million.

According to the Zacks Consensus, EPS is expected to grow to $1.02 for fiscal 2010. This includes stock-based compensation but excludes one-time charges.

Out of the 14 analysts who provided estimates, 1 has raised the estimate for the fourth quarter over the last 30 days and made a positive revision over the last week.

Estimate revisions for full-year 2010 have been mixed with 2 of the 15 analysts providing estimates raising their forecasts in the last 30 days, 1 of which was raised in the last 7 days. 1 analyst lowered the estimate in the same period.

The revisions were made after management cut its GAAP earnings outlook in the first week of January for fiscal 2010 due to a restructuring charge of approximately $90 million incurred in the fourth quarter of 2010. The charge is a part of reorganization in EMC's international business, as pointed out by management.

EMC lowered its outlook for 2010 GAAP EPS from 91 cents to 87 cents. The company also revised its outlook for the GAAP income tax rate from 20% to 24% for 2010. However, revenue and non-GAAP EPS outlook remained unchanged.

Want more from Zacks Equity Research? Subscribe to the free Profit from the Pros newsletter: http://at.zacks.com/?id=5514.

About Zacks Equity Research

Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.

Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today: http://at.zacks.com/?id=5516

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=4580.

Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Join us on Facebook: http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.