The advent of the new price war has pushed Verizon Communications (NYSE:VZ) and AT&T (NYSE:T) to the lower end of their recent trading ranges. While these companies fight out to win customers, how are things looking for shareholders? Does this pullback present an opportunity for long term investors?
This article was written recently about the buying opportunity in AT&T. When talking about AT&T, it is hard for Verizon to stay behind for long. So this article presents a few reasons why Verizon looks interesting here. Let us get into the details.
Valuation and Trading Range: Verizon is right now trading at the lower end of its 52-week range. As mentioned in many previous articles, a stock does not automatically qualify as a buy or sell just based on the trading range. But if a heavyweight stock is trading at the lower end of its range even though earnings and free cash flow have been better than expected, income and value investors need to take a look at the stock.
As shown below, Verizon's stock is down 15% from its 52-week high while earnings have been better than expected for all the four quarters covered in this time period.
(Source: Yahoo Finance)
- Close to 25 analysts have an average price target of $54 according to Yahoo Finance.
- 31 analysts on Marketwatch.com have an average price target of $54.35.
- Trefis.com has a price target of $52.86.
- Putting all those numbers together, the average price target is about 15% away without including dividends.
Forward Estimates: Verizon's forward estimates have seen a lot of revisions to the upside recently. Verizon's 2014 earnings per share are expected to come in at $3.50 per share (without accounting for special charges/credits) and at $3.84 in 2015. That gives Verizon a forward multiple of 13.34 and 12.16. The forward multiples are fairly close to AT&T's but Verizon is expected to grow earnings at 9% per year vs 6% for AT&T.
(Source: Yahoo Finance)
Cash Flow Strength: This article talked in detail about Verizon's free cash flow (FCF) strength, showing that Verizon's dividend commitment to shareholders is sufficiently covered by the FCF. Now, with last quarter's results added to the mix, let us look at the dividend coverage:
- The average quarterly free cash flow has gone up to $3.83 billion from $3.72 billion.
- The lowest and highest quarterly free cash flows stay at $672 million and $6.88 billion.
- Outstanding share count stands at 2.8 billion as of this writing, excluding the new shares awarded to Vodafone shareholders.
- Current quarterly dividend of 53 cents per share requires the company to commit $1.48 billion to shareholders. Based on the numbers presented here, the dividend coverage is more than handy.
- As shown in the chart below, only one quarter in the last 20 has seen free cash flow being lower than the amount required to pay shareholders. Not many companies can do better than that.
Price War: AT&T and T-Mobile (NASDAQ:TMUS) have been all over the news in this ongoing telecom price war. To combat T-Mobile's aggressive rate cuts, AT&T has been forced to announce a series of price cuts as well. While Verizon has also announced a few price cuts, it has not been as frequent as the other major players. Perhaps, Verizon's much touted coverage and better quality are not making it as desperate as the other players in slashing prices. This industry is all about volume now but any margin that a company could squeeze out is for the better.
Technical Indicator: As with AT&T, Verizon's Relative Strength Index (RSI) is in the 40s now. A few more down days could send the RSI near 30, which could indicate a selling exhaustion.
Conclusion: So, what are your thoughts on this telecom giant? Do you believe this is a buying opportunity? Please leave your comments below.
Disclosure: I am long T. 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.