Case Study on Verizon (VZ) with Nobias technology
Telecommunications giant, Verizon (VZ), posted Q2 earnings on Friday morning, before the opening bell on Wall Street. The company missed analyst earnings estimates and posted lower than expected forward-looking guidance, which caused VZ shares to fall by 6.74% on Friday. After this drop, VZ is lower by 15.24% on a year-to-date basis. The share price weakness has pushed VZ’s dividend yield up to the 5.75% threshold; well above the S&P 500’s 1.52% yield. However, the stock’s performance on Friday showed that investors are more concerned about slowing growth than they are about strong dividend income.
Scott Moritz, a Nobias 4-star rated author, recently published an article at Bloomberg which covered Verizon’s Q2 woes. He began that piece by stating, “Verizon Communications Inc. shares plunged to their biggest drop in 14 years after the mobile-phone company cut its forecast for the second straight quarter, adding to concerns that consumers are pulling back on spending.”
Regarding the company’s operations, Moritz said, “Verizon said Friday that it added only 12,000 monthly wireless phone subscribers in the second quarter, well below analysts’ predictions for 167,200 new phone customers.” He also wrote, “Verizon lost a net 215,000 consumer wireless customers in the second quarter and gained 227,000 business customers.”
Not only is Verizon struggling to grow its subscriber base, but as Moritz points out, Verizon’s rival, AT&T, recently noted that subscribers are having trouble, and even delaying, bill payments.
VZ Jul 2022
Moritz noted that Verizon management said that late bill payments aren’t an issue for the company at the moment; however, he did say that Verizon recently “returned to free phone promotions in an effort to counter discounts and giveaways by AT&T and T-Mobile US Inc.” alluding to the fact that these promotions are likely to serve as another headwind to its margins and therefore, its bottom-line performance moving forward.
Regarding full-year guidance, Moritz wrote, “Earnings per share, excluding some items, are now expected to be between $5.10 to $5.25 for the year, down from a range of $5.40 to $5.55, Verizon said Friday in a statement.”
Reinhardt Krause, a Nobias 5-star rated author, published an article at Investors.com in the aftermath of the company’s sell-off on Friday, which highlighted VZ’s Q2 results. Krause said, “For the second quarter, Verizon earnings came in at $1.31 a share, excluding items. Revenue rose 3% to $33.8 billion, edging by estimates.” He continued, “A year earlier, Verizon earned $1.37 a share on revenue of $34.77 billion. Analysts had projected Verizon earnings of $1.33 a share on revenue of $33.77 billion.”
Krause also touched upon the disappointing guidance that management provided. He highlighted the poor earnings-per-share growth data that Moritz put a spotlight on, and continued further, stating, “The telecom now expects adjusted EBITDA growth of minus 1.5% to flat vs. earlier guidance for adjusted EBITDA growth of 2% to 3%.
Krause wrote, “Verizon cut its outlook for wireless service revenue growth to a range of 8.5% to 9.5%, down from 9% to 10%.” In a separate article that Krause published at Investors.com on Friday, he quoted Craig Moffett, analyst at MoffettNathanson, who spoke about the tough competitive landscape that Verizon finds itself in. "They have built their brand on a decades-long positioning as the nation's 'best network' and they have been able to charge a premium for that positioning," Moffett said. "Unfortunately, as we enter the 5G era, we believe T-Mobile, not Verizon, will have bragging rights to best network status."
Krause also included a Moffett quote, which read, "As subscriber growth in an already-saturated wireless industry decelerates back towards population growth, we believe Verizon will be hard-pressed to post positive unit growth."
Krause wrote about another potential headwinds for Verizon moving forward: a high debt load and too few cash flows to repurchase shares into the stock’s recent bout of weakness. He said, “One overhang on VZ stock involves mid-band radio spectrum it bought for 5G wireless services. Verizon stock spent $53 billion in a government auction, including incentive payments to satellite operators and clearing costs. The purchase of midband spectrum for 5G services will delay a VZ stock buyback.”
With regard to that spectrum auction, Krause stated, “Now that Verizon owns sufficient 5G midband spectrum, its network buildout will be key. Verizon aims to reach 175 million people by the end of 2022 with midband spectrum-based 5G services that provide faster data speeds.” However, he continued, “Revenue growth remains an issue. Verizon's long-range problem is that the U.S. wireless market is saturated. Many consumers have delayed upgrading to new smartphones. Plus, data-gobbling mobile video hasn't panned out as a big moneymaker.”
Moving forward, Krause says that “Pundits expect 5G wireless to have a role in manufacturing automation, cloud gaming, autonomous vehicles, drones and remote health care services.” Therefore, the 5th industrial revolution and several of the secular growth trends associated with it could provide long-term demand and fundamental growth opportunities for Verizon.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
However, the stock is trading for just 8.6x the mid-point of management’s new guidance range. This single digit P/E ratio clearly points towards negative sentiment surrounding the stock on Wall Street. During the company’s Q2 report, Verizon’s Chief Financial Officer, Matt Ellis, acknowledged his company’s near-term issues, but maintained a bullish stance looking out over the long-term.
Ellis said, "Although recent performance did not meet our expectations, we remain confident in our long-term strategy. We believe that our assets position us well to generate long-term shareholder value." However, looking at the data collected by the Nobias algorithm, it appears that even with a historically low valuation attached to shares, the majority of credible authors are bearish on the stock. 57% of recent articles published by authors with 4 and 5-star Nobias ratings have expressed a “Bearish” bias.
Right now, the average price target that the credible Wall Street analysts that we track for VZ shares is $56. That figure implies upside potential of approximately 25.4%. Yet, we’ve already seen credible analyst come out with post-earnings updates which included lowered price targets in recent days (such as Nobias 4-star rated analyst, Peter Supino of Wolfe Research, who reduced his VZ price target from $60 to $51, and Douglas Mitchelson from Credit Suisse who is a Nobias 4-star rated analyst, who reduced his VZ price target from $58 to $54). If this trend continues, VZ’s average price target will drop, resulting in a narrower margin of safety.
Disclosure: Nicholas Ward is long VZ. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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