Financial Analysis the Company I essay

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Overall, at&T is the more profitable of the two companies. That Verizon has the stronger gross margins and at&T the stronger net margins indicates that at&T does a better job of controlling its cost structure than does Verizon.

The Industry

The telecommunications industry is highly competitive in both the landline and wireless segments. By 2006, wireless spending had match wireline spending. While this presents significant opportunities for telecommunications, much of that spending comes in the form of cannibalizing, as wireline revenues have been decreasing steady over the past decade, matching the steady increases in wireless spending.

There are four major wireless operators in the U.S. And over 170 regional players (Megna, 2009). Competition is based on coverage area (capital investment), price and customer service. Both firms can be considered industry leaders. As of 2007, at&T had a subscriber base of 65.7 million and wireless revenues of $10.9 billion. Verizon had a subscriber base of 63.7 million and wireless revenues of $11.3 billion. The followers in the industry are Sprint (54 million and $8.7 billion) and T-Mobile (27.7 million and $4.89 billion) (Herperger, 2008). The remaining firms are regional or relatively minor players, although some have experienced strong growth and may one day be more important to the industry dynamic.

With at&T and Verizon running a close one-two at the top of the industry, they are essentially co-leading the industry. Both firms have taken on lead roles in negotiations with the FCC for example, and both strong nationwide coverage. The industry is still growing rapidly, and is subject to a rapid pace of technological change. While the FCC seems determined to keep the industry open, the economies of scale that the large firms have built up will continue to give them a stronger competitive advantage over small firms. There is the possibility of bandwidth restrictions, as there is currently insufficient bandwidth to support demand from consumers. This makes having an established network and large installed base all the more important.

Raising Funds

If Verizon needed to raise funds, it should consider tapping the equity markets. In the wake of taking on a significant amount of new debt last year, Verizon no longer has much capacity for more debt. The firm's debt ratio of 0.79 is high, indicating that the firm is already taking a high risk-high reward strategy. To take on any more debt, however, would be irresponsible.

Tapping the capital markets, however, is fraught with its own challenges. Three of the most important are dilution, the cost of capital, and the state of the capital markets. The former is important because equity issues do not create equity so much as they sell it off. This results in dilution to the existing shareholders. The best way to ameliorate the effects of dilution would be to offer a rights offering. Cost of capital is a concern because equity is typically the most expensive form of capital to be raised. Verizon would find that raising debt costs the company less than raising equity, making equity a less likely or palatable option. Another concern with raising equity is that the capital markets may not be able to provide this funding. The markets are recovering this year after feeling the impacts of the subprime crisis and corresponding recession, but the market for large new equity deals is still not great.

Although debt financing is a relatively unpalatable option for a number of reasons, it is the option I would recommend to Verizon if it needed to raise additional capital at this point in time. The company is unlikely to raise the required funds on the equity markets, would suffer dilution on an already suppressed stock price and the move would increase the company's cost of capital. Debt financing would be relatively easy to obtain -- albeit likely with strict covenants as a result of the firm's already high debt load -- and would cost less than an equity issue.

Lending to/Investing in Verizon

I would lend to Verizon. The company is in a relatively strong financial position. The firm has just taken on additional debt, and that has boosted its liquidity ratios for the time being. However, the fundamentals of the firm's business are strong.

In terms of financial situation, Verizon's is relatively strong. The company earns strong profits and its primary industries are growing. As an industry leader, Verizon is building economies of scale that allow it to control costs. It has demonstrated the ability to control prices. The firm is directly involved at the regulatory level to work with the FCC for a more favorable operating environment. This demonstrates that the firm's capabilities to manage its operating environment, an important factor for a lender.

Verizon has traditionally had strong liquidity as well, and earns decent returns on equity, investment and assets. As a result, there is little concern over Verizon's financial situation or its fundamentals. As a lender at this point, I would likely wish to restrict the ability of Verizon to borrow further by placing restrictive covenants limiting the firm's debt ratio, and perhaps covenants with respect to solvency as well. These steps would merely be enacted to help protect my bank's investment in Verizon.

Despite the high debt load, the rest of Verizon's fundamentals are solid. The firm has a bright future in front of it, particularly as it is well-positioned to handle the inevitable consolidation in the wireless industry and to acquire from the FCC the bandwidth that it will need to ensure its future growth.

As an investor, I would invest in Verizon. The company's strong fundamentals are indicative of a market leader that is well-positioned in a rapidly growing industry. For the most part, Verizon has been able to keep up with the rapid pace of technological change in the wireless industry, and has even been able to grow revenues in its wireline business despite the overall shrinking of that segment in the market. Verizon stock at present has been unduly punished -- its earnings have flatlined but the stock is down some 30% in the past two years. While the S&P 500 has increased in 2009, Verizon has not seen a corresponding increase in its stock (MSN Moneycentral, 2009). As a result, Verizon's stock may be somewhat undervalued at present, or at least is fairly valued. While it performed better in the mid-00s, it had weather the increased competition since then and maintained profitability even during the recession.

As an investor, the high degree of leverage is not a major concern. Indeed it offers the possibility of strong returns on equity in the future. at&T as a comparable is less highly levered, which lowers its risk level. Wireless is a good industry to be in, if the firm is large, and as an investor I wish to capture high returns indicative of the industry's structural risk levels and rapid pace of growth. This can be better attained by buying shares of Verizon than by buying shares of at&T. Overall, Verizon is a strong company and an industry leader. The few black marks on its financial performance would cause me, as a lender to approach with some caution, but as an investor I do not feel that they would be a problem at all. In either case, I would invest in Verizon.

Works Cited:

MSN Moneycentral Verizon. Retrieved October 24, 2009 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=VZ&lstStatement=Balance&stmtView=Ann

MSN Moneycentral at&T. Retrieved October 24, 2009 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=T&lstStatement=Balance&stmtView=Ann

Loth, R. (2009). Financial Ratios Tutorial. Investopedia. Retrieved October 24, 2009 from http://www.investopedia.com/university/ratios/

Chen, B. (2009). Verizon iPhone? Don't hold your breath. Wired. Retrieved October 24, 2009 from http://www.wired.com/gadgetlab/2009/10/verizon-iPhone/

Crockett, R. & Grow, B. (2006). at&T rings a familiar bell. Business Week. Retrieved October 24, 2009 from http://www.businessweek.com/technology/content/mar2006/tc20060306_470983.htm

Megna, M. (2009). at&T: Go easy on wireless industry regulation. InternetNews.com. Retrieved October 24, 2009 from http://www.internetnews.com/bus-news/article.php/3842801

Herperger, D. (2008). U.S. wireless industry: Key developments in 2007. Videotron. Retrieved October 24, 2009 from http://corpo.videotron.com/site/static/.../en/U.S.-Wireless-Herperger.doc[continue]

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