SIVY ON STOCKS from money.com
June 8, 2001

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The favorite phone

Despite all the problems in the telecom industry, Verizon looks like it's
in terrific shape.

By Michael Sivy

If you were looking for an industry to be the poster child of the tech
wreck, you'd have to pick telecom. All three of the major long-distance
telephone firms -- AT&T, WorldCom and Sprint -- are having to face up to
business strategies that have failed. And suppliers of the industry's
infrastructure -- from Corning to Lucent and Nortel Networks -- have seen
short-term demand for their products collapse. But amid all the wreckage, a
few of the local phone companies are in surprisingly good shape. And none
has more to cheer about than Verizon [VZ].

As industry deregulation opened the door to more competition, everyone
expected that long-distance and high-tech would thrive while local service
withered. But just the opposite has happened. Offering long-distance
service is easy: All a company needs is one junction point in each market
it wants to serve. But to compete in local, it needs connections to each
subscriber's house. AT&T tried to get around that by using wireless
technology and cable TV lines to deliver local service.

But getting around established local service has been much harder to pull
off than anyone expected. Local phone companies may indeed face competition
on the home front in three to five years. But in the meantime, they're
enjoying the best of both worlds -- a near-monopoly on their core business,
combined with excellent expansion opportunities in other areas. And no
company is playing both sides better than Verizon.

Verizon's core market is arguably the most valuable in North America -- the
Northeastern United States from Maine to Virginia. Moreover, the company,
which was formed by a merger between Bell Atlantic and GTE in June 2000,
has land lines to more than 30 states. Currently, Verizon is permitted to
offer long-distance service in New York State and Massachusetts and will
expand to other states as regulators permit.

Even more impressive, the company has very strong positions in two of the
fastest-growing telecom businesses -- wireless phones and digital
subscriber lines (DSL) that are used for Internet access. Verizon is No. 1
in wireless, providing service almost everywhere in the U.S. and enjoying
more than a quarter of the total market share. The company's DSL business
is expanding faster than scheduled, passing 500,000 subscribers at the end
of last year and on track to top its 1.2 million target at the end of this
year.

Of course, the company is feeling a bit of a pinch because of the current
economic slowdown. But the merger between Bell Atlantic and GTE provided
the usual post-merger cost-cutting opportunities that give Verizon some
room to compensate for minor business shortfalls. Cost savings could reach
$800 million in 2001 and approach $2 billion in 2002.

For some reason, investors don't seem to be registering all these
strengths. The share price is exactly where it was when I last recommended
the stock in January, even though the company's outlook continues to
improve. Over the next five years, Verizon could offer as much as 12
percent compound annual earnings growth along with a 2.8 percent dividend
yield. That's clearly the makings of above-average total return -- and yet
the shares now trade at 17.5 times earnings. Local phone service may not
sound glamorous, but those are tough numbers to beat.

###

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