Wall Street Lunch: Verizon Buys Frontier

Summary:

• Verizon buys Frontier Communications for $20B cash to expand its fiber footprint.
• Economic data shows mixed signals, with jobless claims falling and ADP private payrolls missing expectations.
• Nvidia addresses antitrust probe rumors; Tesla delays FSD rollout to Q1 2025.
• Check out BofA’s list of global contender and defender stocks.

Listen below or on the go on Apple Podcasts and Spotify

Verizon will pay $38.50/share in cash, but could face regulatory problems. (0:15) Unit labor costs show wage inflation cooling more. (1:39) Chinese EV makers rally on Neo results. (2:36)

This is an abridged transcript of the podcast.

Verizon (NYSE:VZ) announced the deal to acquire Frontier Communications (FYBR) in an all-cash transaction valued at $20B.

The telecom giant said: “This strategic acquisition of the largest pure-play fiber internet provider in the U.S. will significantly expand Verizon’s fiber footprint across the nation, accelerating the company’s delivery of premium mobility and broadband services to current and new customers.”

Verizon will pay $38.50 a share in cash, a premium of 43.7% to Frontier’s 90-day volume-weighted average share price on September 3, 2024, the last trading day prior to media reports regarding a potential acquisition.

Frontier is down about 10% today after rocketing nearly 40% in the previous session in anticipation of the deal.

Seeking Alpha analyst Jeremy LaKosh says “the deal will add long-term value to Verizon shares, (but) the timeline for closing and the regulatory risks have me waiting to invest.”

“While a good portion of this deal makes sense for both companies, there is a regulatory cloud that will likely hang over it for months. It’s important to note that in the last decade, Verizon eventually negotiated a sale of its landline business to Frontier, which in itself faced many regulatory hurdles, before clearing and eventually blowing up on Frontier,” he said.

There was a raft of economic data this morning that overall eased some of the concerns about growth raised on Wednesday with weak JOLTS. The stock and bond markets bounced around, perhaps rangebound going into the big jobs report on Friday.

Weekly initial jobless claims fell a little more than expected, down 5,000 to 227,000. Continuing claims unexpectedly fell to 1.838 million from 1.86 million.

That countered a very weak ADP report on August private payrolls that showed a rise of just 99,000, well shy of the consensus of 140,000. The problem with the ADP report is its extremely weak correlation to the official numbers.

Also on the labor front, Q2’s productivity revisions saw unit labor costs revised down to a +0.4% rise from the initial estimate of +0.9% and compared with +4% gain in Q1.

Kevin Gordon, strategist at Schwab, says the current “trend in unit labor cost is definitively inconsistent with a resurgence in core inflation.”

In addition, the ISM index of services activity, a much bigger part of the economy than manufacturing, edged up to 51.5 in August, up from 51.4 in July and topping the 51.3 consensus.

Among active stocks. Chinese EV makers are gaining after NIO (NIO) said revenue rose 98.9% in fiscal Q2 to $2.4 billion. During the quarter, better vehicle margin was offset by higher operating expenses. Gross margin was 9.7%, compared with 1% a year ago and 4.9% in fiscal Q1 of 2024. Notably, NIO narrowed its net loss compared to a year ago due to the higher level of sales.

Nio said it expects to rack up deliveries of between 61,000 and 63,000 units in fiscal Q3.

JetBlue (JBLU) jumped after it updated its guidance. The company highlighted its operational performance over the summer travel season, as evidenced by an improvement in on-time performance by approximately ten points year-over-year.

JetBlue now sees Q3 capacity of -5% to -3% vs. -6.0% to -3.0% prior outlook and revenue growth of -2.5% to -1.0% vs. -5.5% to -1.5% prior guidance.

Foxconn Technology’s (OTCPK:FXCOF) August revenue jumped 32.81% year over year, driven by demand for servers powering AI products.

The Apple (AAPL) supplier said that the third quarter is expected to generate growth compared to the second quarter and the same period last year, and the current visibility is better than previously estimated.

Stocking with AI, Nvidia (NVDA) said late Wednesday it did not receive a subpoena from the Justice Department regarding an antitrust probe, despite reports that it had.

“NVIDIA wins on merit, as reflected in our benchmark results and value to customers, and customers can choose whatever solution is best for them,” an Nvidia spokesperson told Seeking Alpha. “We have inquired with the U.S. Department of Justice and have not been subpoenaed. Nonetheless, we are happy to answer any questions regulators may have about our business.”

In other news of note. Tesla (TSLA) unveiled plans to launch its Full Self-Driving technology in China and Europe in the first quarter of 2025, pending regulatory approval.

The announcement was made by Tesla’s AI division, laying a roadmap of upcoming smart initiatives in a social media post on platform X.

This timeline represents a slight delay from earlier expectations for a 2024 rollout. Tesla plans to offer FSD as a monthly subscription service in addition to the current one-time purchase option, which could give the company a new revenue stream amid increasing competition.

And in the Wall Street Research Corner. BofA’s is out with a list of global contender and defender stocks, a strategy that looks into earnings and price momentum.

The bottom-up stock selection model showed preference towards the global financials and technology sectors.

Contenders have more exposure to the momentum style with less risk, and defenders are more skewed towards risk and have very low momentum. The global defenders are, on the other hand, expensive stocks with falling earnings momentum and price momentum that are not being derated.

The global contenders have outperformed the defenders by 19.3% year to date.

Among the contenders are Novo Nordisk. (NVO), Broadcom (AVGO), GM (GM), D.R. Horton (DHI), JPMorgan Chase (JPM), Meta Platforms (META), and Tyson Foods (TSN).

The defenders include Diageo (DEO), Caesars Entertainment (CZR), Intel (INTC), Match Group (MTCH), and Snowflake (SNOW).

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