Verizon Stock Seen Pricey; Brokers Ask If IPhone Can Spark Growth.

SAN FRANCISCO (Dow Jones)--Investors in
Verizon Communications Inc. (VZ) have been
betting big on the company's newly announced
deal to sell Apple Inc.'s (AAPL) iPhone product--
pushing the stock to some of its highest valuation
levels in the past decade.
That has sparked debate on Wall Street about
how economically beneficial the device will be to
the carrier, despite widespread projections calling
for the sale of 10 million units or more this year.
In particular, the iPhone likely will be heavily
dilutive to Verizon's earnings this year, given the
subsidies the carrier will have to shell out to Apple
for the device.
And it remains unclear whether the iPhone will
spark growth in average revenue per user, or
ARPU, which is a closely watched metric in the
wireless business.
Investors are betting it will. Verizon shares have
climbed more than 30% over the past six
months--compared to a gain of only 12% for
arch-rival AT&T Inc. (T).
Verizon now trades at about 16 times expected
earnings for the next four quarters, up 45% from
its multiple in mid-2011 and near its high of 16.3
over the past 10 years, according to data from
FactSet Research. AT&T currently trades around
11.4 times earnings.
So will the iPhone greatly expand Verizon's
subscriber base, or merely help the carrier keep
more of its existing customers?
"Because there is not as much subscriber growth
available as there once was, the hope now is
that--if the carriers can cap data usage--users will
pass those caps and drive up revenue," said Tim
Horan of Oppenheimer in an interview
Wednesday.
Horan said most benefits of the iPhone's
expansion will go to Apple, which gets about
$400 for each device in a subsidy from carriers
and draws most of the economic benefits from
its ubiquitous iTunes and App Stores, which sell
content for the devices. The subsidies will also
pressure Verizon's earnings by 20 cents a share
this year, he estimated.
As such, Horan said he maintained a perform, or
neutral, rating on Verizon's shares following the
iPhone announcement.
Others are more optimistic. Goldman Sachs
upgraded Verizon to a buy rating Wednesday
and downgraded AT&T to neutral. In a note to
clients, analyst Jason Armstrong said Verizon's
growth potential is undervalued, even at the
shares' current level.
"Verizon has the largest postpaid sub [subscriber]
base but significantly under-indexes in
smartphone penetration, which creates the
opportunity, particularly given the 2011 device
lineup," Armstrong wrote. He said he expects the
carrier to be able to grow ARPU by nearly 7% this
year.


Source: Http://online.wsj.com/article/BT-CO-20110112-713177.html