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Elevator Pitch
I rate Verizon Communications Inc.’s (NYSE:VZ) stock as a Buy.
My prior August 4, 2022 update for Verizon focused on the company’s -10% share price pullback in July 2022. VZ’s shares have continued to be weak following the publication of my earlier article, dropping by -18.1% as compared to the S&P 500’s relatively more modest -11.6% decline in the same time frame. In this article, I answer the question of whether a buying opportunity has emerged for Verizon now.
I think that this is the time to buy Verizon’s shares. VZ’s valuations have become much more appealing following its share price correction in the past year. The outlook for Verizon is decent, as I don’t expect Verizon to either miss Q3 earnings expectations or cut 2022 guidance again. In the long run, VZ should be a stock boasting lower financial risks and higher shareholder capital return. In view of these factors, I have upgraded my rating for Verizon from a Hold to a Buy.
VZ Stock Key Metrics
Verizon will announce the company’s Q3 2022 financial results next week on October 21, 2022. As such, the key metrics to watch for VZ are the company’s sell-side consensus financial forecasts to determine if there is a risk of Verizon delivering a third-quarter earnings miss.
The Wall Street’s consensus Q3 2022 normalized earnings per share or EPS for Verizon were reduced by a significant -7.1% in the past six months. Moreover, more than half or 17 out of 29 sell-side analysts revised their third-quarter normalized EPS projection for VZ downwards in the last three months.
Specifically, the consensus numbers point to VZ generating a normalized EPS of $1.29 in the third quarter of 2022. This implies that Verizon’s bottom line is expected to decrease by -8.8% YoY in Q3 2022, which is worse than the company’s -4.4% YoY EPS decline for Q2 2022.
In summary, the majority of Wall Street analysts covering VZ’s shares have been lowering their financial estimates for the company, and they expect Verizon to report a larger bottom line contraction in Q3 2022 vis-a-vis Q2 2022. In other words, the market’s expectations of Verizon’s third-quarter financial performance are modest, which suggests that the probability of a severe earnings miss for VZ is reasonably low. As such, a further share price correction for Verizon in response to below-expectations Q3 earnings is less likely to happen.
Nevertheless, there is still a need to understand why Verizon’s shares have underperformed in recent months, a topic that I discuss about in the next section.
Why Has Verizon’s Stock Price Been Dropping?
At the beginning of this article, I highlighted that VZ’s stock price fell by -18.1% since I wrote my previous article for the company. In fact, Verizon’s shares are down by an even more substantial -29.1% in the past one year. In the same time frame, the broader market as represented by the S&P 500 corrected by a milder -15.9%.
There are a few reasons for the drop in Verizon’s stock price.
The first reason is that investors have lost confidence in VZ, as a result of the company’s disappointing management guidance updates provided when it released its financial results for Q1 2022 and Q2 2022.
In late-April when Verizon reported its first-quarter earnings, the company highlighted that its full-year fiscal 2022 “wireless service revenue growth”, “adjusted EBITDA growth”, and “adjusted EPS” are expected to be “at the lower end of” its earlier guidance. When VZ announced its Q2 2022 results on July 22, 2022, it lowered its guidance for all the key metrics like top line, operating profit, and bottom line.
The second reason is that the market is concerned about the resilience of Verizon’s revenue and earnings in an environment of weak economic growth and low consumer confidence.
Notably, VZ did mention at BofA (BAC) 2022 Media Communications & Entertainment Conference on September 8, 2022 that “we have to be mindful of our customers” with “the economic backdrop”, as “they’re feeling the pain in their monthly bill.” Also, Verizon’s peer, AT&T (T) also highlighted at the Goldman Sachs (GS) Communacopia + Technology Conference on September 12, 2022 that there was “some extension on payment cycles” for its subscribers, even though there is no “further deterioration of what we saw earlier in the year.”
The third reason is that Verizon has been ceding ground to the company’s rivals.
According to a MoffettNathanson sell-side research report cited in an August 12, 2022 Fierce Wireless article, VZ “has lost market share in every quarter since the second quarter of 2020.” This is a view validated by the operating metrics for Verizon. In the second quarter of 2022, Verizon achieved postpaid phone net additions of around +12,000. In contrast, AT&T delivered a much postpaid phone net additions figure of in excess of +800,000 in the most recent quarter.
In the subsequent section, I touch on Verizon’s valuations in light of the company’s share price drop for the last one year.
Is VZ Stock Fairly Valued?
VZ’s stock is undervalued.
Verizon currently trades at 7.1 times consensus forward next twelve months’ normalized P/E according to valuation data taken from S&P Capital IQ. The stock is now trading at a -45% discount to its 15-year average forward P/E multiple of 13.0 times.
VZ’s consensus forward next twelve months’ dividend yield of 7.1% is enticing and also +45% higher than the stock’s 15-year mean forward dividend yield of 4.9%.
Is Verizon A Buying Opportunity Now?
I am of the view that Verizon is a buying opportunity now.
As I have discussed in the preceding sections, VZ’s current valuations have priced in much of the negatives for the stock, and the risk of a Q3 2022 earnings miss for the company is low.
There are two other factors that play a big part in my assessment of Verizon as a promising investment candidate now.
One factor is that Verizon should be to keep its full-year FY 2022 management guidance unchanged when it reports its Q3 2022 earnings next week, unlike what happened during its Q1 2022 and Q2 2022 financial results announcements.
At the company’s most recent investor event, the Goldman Sachs (GS) Communacopia + Technology Conference on September 14, 2022, VZ revealed that “two months into the quarter (Q3 2022), clearly we have more gross ads” and stressed that “we’re growing that month-over-month.” In my view, this seems to imply that Verizon has been largely performing in line with expectations for most of the third quarter and trends appear to be positive.
The other factor is that Verizon stands out as a relatively more defensive pick in the current market.
Apart from the recurring subscription revenue streams, VZ’s status as a pure domestic play is a key positive. Unlike many other listed stocks with foreign exposure, Verizon isn’t affected by major headwinds such as China’s COVID-zero policy, economic and energy issues in Europe, and the strengthening of the US dollar.
What Is The Long-Term Prediction For Verizon Stock?
The key long-term prediction for Verizon relates to the company’s capital management and capital allocation.
At the company’s Investor Day in March, VZ emphasized that the company should achieve its “1.75 to 2x target leverage ratio by 2025”, and it also mentioned that it “will consider share repurchases at 2.25x net leverage.” As a reference, Verizon’s net leverage ratio was 2.7 times as of June 30, 2022.
As indicated earlier, VZ currently offers a very appealing high single-digit dividend yield. The stock’s future potential shareholder return yield (sum of dividends and buybacks divided by market capitalization) could be even more attractive with the company having the intention to initiate share buybacks as its financial leverage comes down to a more comfortable level.
In a nutshell, Verizon’s capital management and capital allocation goals for the long run suggest that VZ’s investment appeal will grow going forward. This is because Verizon should become less leveraged and boast a higher level of shareholder capital returns over time.
Is VZ Stock A Buy, Sell, or Hold?
VZ stock is a Buy. Verizon’s valuations are sufficiently depressed based on a comparison with historical averages, and I don’t expect negative surprises in the form of below-expectations Q3 earnings or reduced fiscal 2022 guidance.
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