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Verizon Impresses in a Tough Wireless Environment

It remains the best-positioned wireless carrier in the industry and shares are currently modestly undervalued, writes Morningstar’s Mike Hodel.

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We remain impressed by  Verizon's (VZ) ability to weather the wireless competitive environment. The firm added 430,000 net new postpaid phone customers during the third quarter, similar to a year ago, with customer loyalty remaining exceptionally strong. We continue to harbor some concerns about the overall health of the wireless business, but we believe Verizon remains the best-positioned wireless carrier in the industry, worthy of a narrow economic moat rating. The shares are modestly undervalued, in our view, and look attractive relative to other large-cap telecom rivals like  AT&T (T).

The wireless competitive environment remains challenging, with  T-Mobile (TMUS) and  Sprint (S) introducing aggressive headline pricing on phone lease plans around the launch of the latest iPhone. Despite this pressure, Verizon's monthly postpaid customer churn declined year over year to 0.93%, the lowest third-quarter mark in three years. On the flip side, Verizon's pricing power in this environment remains limited. Adjusting for the adoption of Edge phone installment plans, we estimate average billings per postpaid account increased less than 1% year over year, continuing the sharp slowdown in growth seen over the past 18 months. We believe the mismatch between revenue growth and increasing data consumption bears careful watching as carriers invest heavily to expand network capacity.

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Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.