VZ is trying to reverse a long-term downward trend. Is it worth buying at its current price?

“Uncertainty” is a good way to describe market conditions since the start of the new year. Massive spikes in COVID infections late in 2021 from the omicron variant have also given way to big increases in hospitalizations, which means that pressure on our medical system continues to strain healthcare workers and first responders to their limits on one side of the economic picture, with the Fed’s stated plan to start increasing rates next month on the other side. That has naturally increased market volatility, and pushed stocks in a lot of previously in-favor industries and sectors off of their highs and into their own near-bear-market price ranges.

While a broad drawdown is a scary thing in the short-term, it also opens the possibility of new buying opportunities in good stocks at much better prices than than they have been as recently as just a couple of weeks ago. The market is an emotional animal, and that means that threshold levels like -5%, -10%, -20% below previous highs, and so on are levels that the market can use to either swing back in a positive direction, or to start selling even more aggressively than before. That also means that these thresholds mark the potential for both more opportunity and increasing risk.

Increasing risk is something that most investors don’t recognize until it’s too late, which turns caution to fear, and possibly even to panic; that is why fear tends to drive average investors away from the markets. If you can take a longer-term view, or even take a contrarian perspective of things, however, you can usually find terrific opportunities even as the market keeps pushing to new highs. An example of what I mean is to look at the reality that most businesses that rely on face-to-face interaction continue to be forced to operate in pretty modified terms for safety purposes, even as economic activity remains pretty high. That means that recovery on the consumer side of many business operations has been slow going, and that it could take longer than most people want to admit.

The wireless telecommunications industry is an interesting case in point. Shelter-in-place orders, work-at-home arrangements, and the continued need to maintain social distancing measures for the past year have increased just about everybody’s reliance on their mobile devices, which is generally good news for the companies that provide those products and the services that come with them. The economic pressures associated with unemployment and rising consumer costs, however also means that demand for new devices, including upgraded smartphones, tablets, wearables, and so on, has been pretty muted, and is expected to continue to follow that pattern. That is likely to keep pressure on those companies to manage their operations as efficiently as possible – which could be a challenge, as leverage in this industry was already very high before the pandemic hit, even among the largest and most established companies, like AT&T and Verizon Communications Inc. (VZ). Continued pressure on revenues is likely to persist for these company’s existing operating models and force liquidity, which was already a red flag for most of the industry, to deteriorate.

That’s the bad news – but I also think that there is quite a bit of good news to consider, as well. Over the last few years, VZ has been one of the biggest investors in acquiring 5G spectrum, and are the first major provider to start rolling out 5G connectivity in their network. The implementation has seen slow, but steady going so far, with only a small portion of its nationwide network having access to 5G towers, and the truth is that 5G-level bandwidth has proven to be spotty so far at best. Even so, this is an area that VZ continues to invest in heavily, and as one of two dominant players in the telecomm industry and in building out the infrastructure for 5G service, it should be expected that in the long run, these issues will be resolved. That is why 5G still represents a long-term growth opportunity. Sooner or later, consumer trends will shift back in the favor of the tools that enable faster wireless connectivity, and that means that companies that have been at the front of the pack on the capital investment, development and implementation side will still be the winners in this game. 

VZ’s stock price has spent most of the past year in a downward trend that can be attributed to some of the short-term concerns I just described, but also runs counter to an overall strong fundamental profile that includes a bargain proposition that puts its target price almost 50% above its current price. VZ has borrowed heavily to finance its capital investments, including its 5G buildout, but that is also countered by healthy free cash flow and operating margins that have held up better than expected in the current economic environment, along with a higher-than-average dividend. Does the combination make VZ a stock worth paying attention to? Let’s find out.

Fundamental and Value Profile

Verizon Communications Inc. is a holding company. The Company, through its subsidiaries, provides communications, information and entertainment products and services to consumers, businesses and governmental agencies. Its reportable segments are Verizon Consumer Group and Verizon Business Group. Its Consumer segment provides wireless and wireline communications services. Its wireless services are provided across wireless networks in the United States under the Verizon Wireless brand. Its wireline services are provided in nine states in the Mid-Atlantic and Northeastern United States, over its 100% fiber-optic network under the Fios brand and via traditional copper-based network. Its Business segment provides wireless and wireline communications services and products, video and data services, corporate networking solutions, security and managed network services, local and long-distance voice services and network access to deliver various Internet of Things (IoT) services and products. VZ has a current market cap of about $226.4 billion.

Earnings and Sales Growth: Over the last twelve months, earnings grew by about 8.25%, while revenues decreased by -18%. In the last quarter, earnings declined by -7.09%, while revenues improved by 3.5%. VZ operates with a healthy operating profile that nonetheless saw margins weaken in the last quarter. Over the last twelve months, Net Income was 16.51% of Revenues, and declined to 13.54% in the last quarter.

Free Cash Flow: VZ’s free cash flow is healthy, at more than $22.5719.2 billion, and translates to a useful Free Cash Flow Yield of 8.62%. Compared to the last year, Free Cash Flow is a bit lower, from $25.2 billion, as well as from the quarter prior, at $22.5 billion.

Dividend: VZ’s annual divided is $2.56 per share (increased from $2.46 in the middle of 2020, and $2.51 in 2021), and which translates to an impressive yield of 4.81% at the stock’s current price. An interesting note I picked up from one recent economic report recognized the general fundamental strength of the Telecom Services sector, T and VZ in particular, with dividend payout levels well above bond yields, and limited currency or global macroeconomic risks. That supports the notion that, to a point, this sector could be viewed as an “equity bond” in a continued, low interest rate environment.

Debt/Equity: VZ carries a Debt/Equity ratio of 1.72, which is generally considered a high number that isn’t unusual for stocks in this industry. Their balance sheet shows about $2.9 billion in cash and liquid assets versus more than $143.4 billion in long-term debt. It should be noted that in the quarter prior, cash and liquid assets were more than $9.9 billion, marking a significant, and even alarming decline. Their operating profile indicates that servicing their debt, even though it is high, shouldn’t be a problem, but continued deterioration in Net Income, and declining liquidity could complicate that question.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $79 per share, which suggests that the stock is significantly undervalued right now, with about 49% upside from its current price.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s downward trend from high at around $59 in May of 2021 to its low at around $50 in December; it also informs the Fibonacci retracement lines shown on the right side of the chart. The stock has picked up some bullish momentum from that low point, and is attempting to reverse its downward trend, having driven above the 38.2% Fibonacci retracement line and now approaching immediate resistance at around $54.50. A push above that level would confirm a new bullish, short-term trend for the stock, with room to rally to about $56 to next resistance. current support should be around $53; a drop below that point should find next support at around $51 where the stock has seen multiple pivot low points going back as far as October.

Near-term Keys: VZ offers a compelling value proposition, with a higher-than-average dividend that makes for tempting bait for both value and fundamental-oriented investors. I do think, however that the company’s decline in Free Cash Flow and Net Income, with a troubling slide in liquidity are trouble signs that could be signs of increasing risk in this stock. If you prefer to focus on short-term trades, you could use a push above $54.50 as a signal to buy the stock or work with call options, with an eye on $56 as a practical, short-term, bullish profit target. A drop below $53 should be taken as a signal to consider shorting the stock or buying put options, with $51 providing a useful profit target on a bearish trade.


  

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