Storm, Strike Take Toll on Verizon (VZ)

The largest U.S. mobile services provider Verizon Communications (VZ) expects the storm in the U.S. East Coast and the labor strike last month to increase its overall cost by $200–$250 million (before taxes) in the ongoing third quarter.

Employees struck work in the company’s wireline division in the Mid-Atlantic and Northeast regions, which is losing money to cable-TV carriers. Persistent losses in access lines are weighing on revenues and margins of the division. Many of the striking technicians install and maintain the company’s new FiOS fiber-optic network, which represents an integral part of the carrier’s long-term growth strategy.

During the recently concluded second quarter, Verizon added 184,000 and 189,000 new customers to its FiOS TV and FiOS Internet services, respectively. The penetration rate (subscribers as a percentage of potential subscribers) of both FiOS Internet and FiOS TV surged to approximately 34% and 30%, respectively, across all markets from the year-ago levels of 30% and 26%.

A 14-day strike by 45,000 employees created a huge backlog in cable installations and repair work. This backlog piled up even more because of Hurricane Irene and Tropical Storm Lee.

Despite paying the employees thrice of what they usually earn, the backlog still persists. We believe strike-related backlog will continue taking a toll on customer additions for the next two to three months.

However, the aberration is limited to its wireline business while its wireless division, a joint venture with Vodafone Group Plc (VOD), is doing well and is expected to generate healthy results in the current quarter. Notably, the wireless business was not impacted by the strike.

Verizon remains the leading provider of wireless voice and data communication services in the U.S. as it continues to expand its 3G and 4G Long-Term Evolution mobile broadband networks. The company’s wireless growth prospects remain strong, driven by customer growth, higher smartphone adoption and the sale of Apple Inc.’s (AAPL) iPhone that will lead to improved revenue.

We are maintaining our long-term Neutral recommendation on Verizon. The stock retains a Zacks #3 (Hold) Rank for the short term (1–3 months).

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