Debt-Laden Verizon Is Still A Buy - Price Target Is $54

May.21.14 | About: Verizon Communications (VZ)

Summary

Despite the heavy debt handicap, Verizon is still worth betting on. Alpha Omega Mathematica rates it a Buy.

Technical Indicators from BarChart also endorses VZ as a Buy.

Berkshire Hathaway and John Paulson recently took large positions in Verizon. It is best for long-term small investors to follow where the big boys are going.

My favorite valuation tool, Alpha Omega Mathematica (AOM) gives Verizon Communications (NYSE:VZ) an aggregate score of 68% and a Buy recommendation. This math-heavy assessment from AOM is after AT&T (NYSE:T) married DirecTV (DTV). On the surface, AT&T is now more attractive because of its better growth prospect from the synergy that DTV brings.

Looking at the 10-year performance chart below, T and VZ delivered almost equal returns to their investors.

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Source: Morningstar

Verizon, like AT&T, has also consistently paid good dividend over the last decade. AT&T pay outs a higher dividend rate but the valuation algorithm still give VZ a higher aggregate score than T which only garnered 62%. The computational engine of AOM is likely still not adding the growth indicator factors that DTV offers to T.

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Source: getaom.com

The 10-year financial performance of Verizon is of steady single-digit growth in revenue with recent improvements in operating margins.

Click to enlargeSource: Morningstar.com

The new debt incurred and shares dilution after the $130 billion acquisition of Vodafone's 45% stake in Verizon Wireless did not discourage the valuation engine of AOM - it still produced a Buy recommendation of VZ.

In terms of value, Verizon offers long-term investor great dividend yield and good Price/Sales, Price/Free Cash Flow, and PEG ratios.

Verizon won its Buy recommendation primarily through its Value Indicators. Here's AOM's statistical score chart for VZ when compared to its Market, Sector, and Industry peers.

Growth Strategy modeling by Alpha Omega Mathematica gives VZ a Buy rating compared to its market, industry, and sector peers. Due to the high debt ratio, Value Strategy and Momentum Strategy models only recommend a Hold for VZ when compared to its Industry peers like AT&T.

Debt Handicap Ignored

The debt handicap is the reason why Modern Graham considers Verizon overvalued. However, the math of Modern Graham did not discourage Berkshire Hathaway from recently buying more than 11 million VZ shares. Verizon's good Price/FCF ratio and cheap debt payments are maybe some of the reasons why Berkshire Hathaway did not mind the high Debt Equity (8.64) and P/B (13.11) ratios of Verizon.

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Source: Finviz.com

John Paulson also recently bought 8.75 million Verizon shares. Paulson is clearly betting that VZ can still run up despite its heavy debt handicap. Finviz analysts give VZ a median price target of $53.72. Analysts polled by markets.ft.com gives Verizon a 12-month median price target forecast of $54 and a high price of $57.

Big investors and analysts are clearly ignoring the debt handicap and very optimistic on Verizon's future.

Paulson might also be betting because technical indicators are screaming a Buy opportunity for VZ. A check on BarChart.com confirms that Verizon's short, medium, and long-term technical indicators are all singing for the buy-side team.

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These positive technical indicators are in line with the Strong Buy recommendations that 17 BarChart analysts gave VZ.

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It is important to also note that no analysts from BarChart.com dare call for a Sell for VZ. No analysts polled by markets.ft.com came up with a Sell vote. Out 41 analysts, 11 gave Verizon a Buy recommendation and 13 analysts said it will outperform the market.

Conclusion

It is always safer for small long-term investors to go where big investors like Berkshire Hathaway and Paulson went. They made big bets on VZ in spite of its heavy debt handicap. Seasoned analysts also agree with the bullish sentiment of Paulson. The technical indicators also call for investors to bet on VZ.

Please remember that Verizon already has more than 5.3 million FiOS TV subscribers.The acquisition of Intel's OnCue Cloud TV gives VZ the necessary technology. Verizon's nationwide 4G LTE network is ready for IP-based TV/Movie streaming.

The LTE coverage map below is why analysts are bullish on VZ. IP-based streaming video is a growth industry where Verizon is well-equipped for.

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Even without DTV or Dish Network (NASDAQ:DISH), Verizon with its high-speed 100% LTE broadband network, can offer wireless over-the-top pay-TV service to its 97.3 million mobile postpaid subscribers, 72% of which are using smartphones. Trefis' sum-of-parts $49.92 valuation of VZ is already higher than the current stock price. This should be a loud call to buy some VZ now.

The median 12-month price target of $54 from markets.ft.com analysts is reasonable and highly probable.

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.