Verizon Hits Rocky Road
On Friday, an arbitrator ruled that Verizon violated worker contracts when it laid off 2,312 New York employees last December. Verizon must hire the employees back and pay for seven months of backpay and benefits. The carrier is also awaiting arbitration rulings involving 1,129 employees laid off in other states.
Verizon suggests that the incremental cash cost of the decision would be roughly $25 million. The total charge for the December layoff, which included 7,000 employees, was $604 million.
Verizon faces other labor hurdles, as its August 2 contract deadline with the Communications Workers of America union approaches. It’s been estimated that more than 70,000 of the company’s 229,000 employees could strike if a settlement is not reached.
The company has been preparing for the possible strike by training all non-union employees, canceling vacations, and asking retirees to come back in the event of a strike.
Labor issues aren’t the only issues facing Verizon. The carrier is expected to report even more local phone line loss in the second quarter, due to competition in Maryland, Virginia, and Massachusetts from AT&T Corp. (NYSE: T). DSL adoption is also expected to disappoint, coming in nearly flat from first-quarter 2003 results, despite the carrier’s lower pricing scheme.
The impact of the labor ruling, coupled with increasing competition in the local phone market, has made at least one analyst more cautious about the company’s stock.
"On a relative basis, the company could be in for a comparatively rougher ride versus its Bell peers over the next three months,” writes John Hodulik, an analyst with UBS Investment Research, in a research note this morning. Despite believing that Verizon's wireless fundamentals are the "strongest in the industry," he expects weaker overall performance from Verizon, compared to other Bells, in the next few quarters.
For one thing, Hodulik estimates the impact of the rehire ruling to be an additional $30 million to $60 million, assuming that the company does not reverse a part of that charge but keeps these employees on the books through the end of 2003.
What's more, Verizon's labor problems seem to be worsening. As the carrier prepares for new contract talks, management and labor appear to be far apart on several issues, including healthcare contributions, absenteeism, job security, work transfers, and the unionization of Verizon Wireless. Hodulik believes Friday’s ruling will only harden the union’s stance in the negotiations, especially when it comes to job security.
"The decision does not change the need for the company to address the challenges facing the business," the company said in a prepared statement. "The difficult business conditions facing the company, the same conditions that caused the layoffs, all remain. The company and unions will have to address job security issues in the current bargaining to match them to the changing telecommunications industry."
A prolonged strike could hurt the company’s earnings and may cause the company to adjust its outlook, says Hodulik. He also points out that shares in Verizon stock dropped 15 percent one month prior to the last Verizon strike, which lasted for a week in August 2000.
Hodulik maintains his Neutral 1 rating on the stock. SBC Communications Inc. (NYSE: SBC) is his top pick among the Bells. While local phone line additions are also expected to decline for SBC, he says the carrier will likely accelerate its DSL additions, which showed the strongest quarter ever for any of the Bells in the first quarter of 2003. Also, SBC’s long-distance entry should be complete in the middle of the fourth quarter of 2003, and results from its partnership with Cingular Wireless should show improvement.
Verizon was trading down $0.77 (1.00%) to $38 today. SBC was up in morning trading, but then fell $0.04 (0.16%) to $26.68. BellSouth Corp. (NYSE: BLS) and Qwest Communications International Inc. (NYSE: Q) were both trading up -- BellSouth up $0.25 (0.95%) to $26.68 and Qwest up $0.07 (1.47%) to $4.82.
— Marguerite Reardon, Senior Editor, Light Reading