Taking Stock: Impact Of Tragedy On Verizon Is More Emotional Than Financial

Verizon stock remains sound, despite its recent volatility.
William SchaffHand me a couple of aspirin. Sept. 17 to 21 represented the stock market's worst week in 60 years. Investors reacted to the attacks on New York and Washington with a mix of emotion and fear rarely seen in modern times. Selling flooded Wall Street exchanges in the wake of the attacks on the World Trade Center and the Pentagon. But despite the overwhelming selling pressure on most stocks, there was an unusual stalwart shining through the dust: New York's regional Bell operating company, Verizon Communications (VZ-NYSE).

Verizon is one of the largest companies in the United States, with revenue last year of $64.7 billion and adjusted net income of $7.9 billion. It's the product of the acquisition of Nynex by Bell Atlantic, followed by the merger between Bell Atlantic and GTE. Verizon is divided into four divisions: domestic telecom (68% of revenue), domestic wireless (22%), international (3%), and information services (7%).

Domestic telecom provides residential and business services, mainly in the eastern United States. The services include local telephone service, data transport, advanced calling features such as caller ID and call blocking, and Internet access in the form of dial-up and DSL. This segment has been growing at a very pedestrian annual rate of 3% to 4% over the last couple of years, about what you'd expect from a large company in a mature business. Verizon has tried to its boost growth rates by offering DSL services and by entering the long-distance market.

Verizon Wireless is a joint venture between Verizon (55% ownership) and Vodafone's Airtouch subsidiary (45%). The combined entity provides cell-phone service across the country. Revenue growth has decelerated in recent quarters to about 15% per year.

Much of the volatility in Verizon's stock price lately is, of course, due to its exposure in New York City. What's the impact on Verizon's business? The World Trade Center disaster caused substantial damage to a central office on West Street and damaged cables running in that area. The official version is that the central office served about 200,000 voice lines for homes and small businesses, or about 10% of all Verizon lines in the city. But this doesn't account for the 100,000 voice lines for large businesses and their data-capacity equivalent of about 3.5 million circuits. The company was scrambling in the aftermath of the Trade Center's collapse, and it's still working to get back to full capacity. In addition, 10 cell-phone sites were destroyed. Almost all were quickly replaced by temporary or permanent equipment, and most of the physical damage will be covered by insurance.

The company deployed extra personnel during the week following the disaster, which will increase costs slightly this quarter. Verizon will experience lower calling volume from Manhattan due to the outage, though probably not for long. Calling volume was up 100% during the first days after the attacks but has since returned to normal levels. Also, cell-phone use was up substantially. While it, too, has returned to more normal levels, the company could benefit long term, as indicated by the long lines at its wireless stores.

Verizon generates about 13% of its annual revenue from New York state. About 40% of the state's population lives in New York City. Add some extra to account for the high number of businesses in the city, and let's assume that half of the state's revenue, or 6.5% of total revenue, comes from the Big Apple. Assuming that 6.5% of total net income also comes from New York City, the impact on this quarter's results would be about 5 cents off the current estimate of 78 cents, even if the city generates little profit for the quarter. This decrease is at least partially offset by higher call volume. Verizon might be relatively unscathed financially by this tragic event.

The company's real issues remain the same: old equipment that needs to be replaced, a tough competitive landscape, and entry into long-distance phone service. As always, investing requires analysis and decisions based on facts, not just emotions. Little wonder that Verizon held up in the aftermath.

William Schaff is chief investment officer at Bay Isle Financial Corp., which manages the InformationWeek 100 Stock Index. Reach him at [email protected].

To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.

To find out more about William Schaff, please visit his page on the Listening Post.