Verizon: Solid Business But Fairly Valued

| About: Verizon Communications (VZ)

The agreement between Verizon (NYSE:VZ) and Vodafone (NASDAQ:VOD) was officially completed. Verizon increased its gross debt to about $110B while increasing the share count to about 4.1B to finance the deal. The agreement doesn't change the operations of the firm, as Verizon previously held the controlling interest.

In 2014, Verizon should benefit from new wireless data plans and FiOS success. Strength in Wireless could be partially offset by weakness in Wireline. Consolidated revenue is forecasted to increase to $125.4B. The Vodafone agreement doesn't excessively increase the leverage of the firm, and shareholders should be happy with over $6B of dividend payments during the fiscal year.

Longer term, the outlook for Verizon is bullish, but near term, the firm is fairly valued. The base case valuation is $43 per share with an optimistic valuation of $50 per share. Verizon could remain in a range between the two valuations for at least the rest of the first quarter.

Recent Developments

  1. Sprint intends to build out its 4G-LTE wireless network, in an attempt to compete with Verizon and AT&T. Sprint's wireless network technology remains well behind its competitors, who are probably planning the build out of 4G-LTE-a networks.
  2. Verizon's CEO expects to agree to terms with Netflix, which hopefully means that my video stream won't pause as often during episodes of House of Cards.
  3. Morgan Stanley and JPMorgan rate Verizon "Overweight" with PTs of $52 & $57, respectively.
  4. Verizon officially completed its $130B purchase of Vodafone's stake in Verizon Wireless.
  5. There is increasing price competition in the wireless network industry.

Business Summary

Verizon Communications Inc. is a provider of communications, information and entertainment products and services to consumers, businesses and governmental agencies. Its two segments are Wireless and Wireline.

At the end of 2013, Verizon had 274 days of liquidity with a current ratio of 2.62. The financial leverage ratio was 2.76, and the debt-to-capital ratio was 0.50. Following the Vodafone agreement and at the end of the first quarter, the estimated days of liquidity are 173. The current ratio declines to 1.02, and the financial leverage increases to 2.96. The estimated debt-to-capital ratio is 0.53. There should be ample liquidity and strong solvency following the Vodafone agreement.

For fiscal 2014, the forecast is for revenue of $125.4B with net income of just over $15B. The share count is forecasted to increased to 4.1B following the Vodafone agreement. Thus, 2014 EPS is forecasted to be $3.67. The EPS forecast is highly uncertain as pension expense or income has a high degree of variability. The assumption is that the net income margin is 12%.

Verizon's quality of earnings is high based on both the balance sheet and income statement methods of evaluating earnings quality. This is unsurprising as a substantial portion of the company's customers pay for their service(s) on a monthly basis.

Surprisingly, Verizon has become more efficient in recent years. The receivables turnover ratio and inventory turnover ratio are trending higher. Additionally, fixed asset turnover is trending higher. The substantial increase in scale hasn't decreased the firm's efficiency.

Looking forward, the Wireless segment should continue to generate almost all of the growth and returns for shareholders. But the Wireless segment faces a headwind from higher penetration of smartphones. Additionally, Google (NASDAQ:GOOG) may start to challenge Verizon in the broadband Internet industry.


  1. The share price is likely to remain volatile, and investors could lose a portion or all of their investment.
  2. Investors should judge the suitability of an investment in VZ in light of their own unique circumstances.
  3. A decline in the global economic growth rate and/or a decline in the pace of economic growth in the United States could adversely impact the results of operations and the share price.
  4. Competition in product pricing could adversely impact performance.
  5. Incorrect forecasts of customer demand could adversely impact the results of operations.
  6. Higher interest rates may reduce demand for VZ's offerings and negatively impact the results of operations and the share price.

This section does not discuss all risks related to an investment in VZ.

Portfolio & Valuation

Verizon is in a bear market of intermediate-term degree. It is a range trade between $45 per share and $51 per share. The 14-week RSI remains in a bull range as the 50-week MA acts as support. A sustained break below $44 per share would likely lead to an extended bear market.

Since 2009, the share price of Verizon has been highly correlated with the share price of the broader market (NYSEARCA:SPY). But more recently, the correlation has declined to 0.61. At even 37% of the variation of Verizon being explained by the broader market, forecasts for Verizon should include forecasts for the broader market.

The share price of Verizon is currently trading below its long-term trend line. Consequently, the price targets are above the current market price. The 3-months, 6-months, and 12-months price targets are $51.53, $53.11, and $56.28 per share.

Verizon outperformed the market for most of the current cyclical upturn. But right now, it appears more likely than not that Verizon will underperform the market in the coming months.

Verizon is forecasted to pay $6.2B in dividends to shareholders during fiscal 2014, which means the estimated DPS is $1.51. Using a constant growth model, the base case valuation is $43 per share with an optimistic valuation of $50 per share. The pessimistic valuation is $37.64 per share. Thus, Verizon is fairly valued according to the model.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.