Analysts question Verizon's prospects following positive earnings

Analysts generally agree that Verizon's (NYSE: VZ) latest earnings report demonstrates another solid quarter. But there's little consensus about how bright the future is for the nation's largest carrier.

Verizon yesterday posted 1.52 million net adds during a fierce fourth quarter in the wireless market, enjoying a churn rate of just 0.96 percent. It saw $23.7 billion in total wireless revenues during the period, marking a 1.2 percent year-over-year increase, and service revenues plus installment billings increased 1.4 percent compared with the fourth quarter of 2014.

"VZ's Q4 report showed disciplined and balanced growth highlighted by strong margins and customer metrics in its wireless segment," analysts at Wells Fargo Securities said in a research note. "While VZ does have to manage through some challenges in 2016 -- the transition toward wireless installment plans, the divestiture of wireline properties to Frontier, the ramp of emerging Internet of Things and mobile video businesses -- we continue to favor VZ in these volatile markets for its strong free cash flow generation, attractive dividend yield and high-quality customer base."

Wells Fargo reiterated its "Outperform" rating on Verizon but lowered its valuation range to $50-$52 per share, down from $54-$56 per share.

Similarly, Jefferies analysts recognized Verizon enjoyed a "modest EPS beat" during the quarter, but warned that its transition from subsidized handsets to equipment installment plans is taking a toll on its ARPA (average revenue per account).

"Despite fewer activations on installment plans, ARPA declined 6.6 percent, an acceleration from the 5.5 percent decline in 3Q," Jefferies said in a research note. "Results reflect a widening gap between postpaid phone subs on unsubsidized pricing (more than 40 percent) and those making monthly device installment payments (29 percent), hinting at retention strategies and off-contract customers opting into lower pricing."

Walter Piecyk of BTIG agreed that a rapid transition to EIPs is key to Verizon's prospects over the next few quarters. BTIG's forecast for Verizon's EPS "barely budged" following the carrier's earnings report, but "We could diverge from consensus further if Verizon can't ramp up its phone payment plan as fast as we expect."

Piecyk also noted that while Verizon's churn at some point will plateau, resulting in fewer net adds, BTIG doesn't anticipate that occurring in the next two years.

Finally, analysts at New Street Research again warned investors that Verizon will increasingly struggle to support traffic as data consumption continues to ramp up. Verizon has less capacity per subscriber than the three other major operators, according to New Street, and less than half of the capacity per subscriber of T-Mobile.

"Verizon has to either double capacity or halve share," according to a New Street research note. "Given fixed costs and leverage the latter is not an option; they need capacity. We think they need spectrum (DISH's spectrum in particular); however, they believe they can get there will small cells. If they do, network opex would need to increase sharply, and this doesn't appear to be in consensus estimates. We would continue to avoid the stock."

In other noteworthy Verizon news, the carrier's CFO told Cnet that "at this point, we are not going to entertain" bringing back an unlimited data plan. Those comments come just weeks after AT&T introduced its own new unlimited data plan, which is only available to customers who also subscribe to AT&T's pay-TV services.

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