Verizon: Don't Get Too Negative

| About: Verizon Communications (VZ)

Summary

Verizon reported in-line Q1 numbers that provided limited catalysts for a stock rebound.

The net customer numbers in wireless and FiOS support that the prime business segment is reaching peak levels.

The stock becomes attractive on further dips as the P/E multiple and dividend yield offer solid support.

My investment thesis starting toward the end of March was that Verizon Communications (NYSE:VZ) likely would trade weak for a period of time. The combination of the big rally from $44 to $54 in a few months and the bidding process for Yahoo (NASDAQ:YHOO) weren't agreeable to higher stock prices. The recent union strike only added fuel to the pullback while the following strategies for growth are going to take time.

Source: Verizon Q116 presentation

Now the stock took a 3.3% hit from an in-line Q1 earnings report with a lot of indicators of peaking business conditions in the wireless sector and the wireline growth areas. My thesis though was for more of a slight dip in the stock, suggesting the drop to $49.50 today might soon provide a buying opportunity.

The crux of the problem is that the Q1 numbers really cemented the concept that the wireless market is virtually maxed out. The implication is that flat earnings in 2016 might actually lead to declining numbers in 2017, as analysts now forecast.

The earnings were a solid $1.06 per share for nearly 4% growth, but the organic revenues were actually down 1.5% led by a decline in wireless service revenues. The good news is that AOL did generate the highest revenues in five years, but the business is too small that it would take phenomenal growth to move the needle.

The prime concerns popped up with the net customer additions in key wireless and wireline segments. Despite adding 452,000 4G smartphones, Verizon actually saw postpaid net adds drop 8,000. All of the growth in the quarter came from adding tablets.

The wireline segment wasn't any better with FiOS having a smaller net addition in comparison to the prior period. Verizon added 98,000 net FiOS Internet connections and 36,000 net video connections last quarter. These numbers compared to 133,000 net Internet connections and 90,000 net video connections last Q1.

So organic revenue growth is turning negative as Verizon is unable to grow the installed base, but dumping the stock below $50 isn't so easy. At the current price, the dividend yield jumps to over 4.5%. At the same time, the churn rate continues heading down with the latest Q1 print dropping 7 basis points to a low 0.96%.

These strong numbers suggest the ability for Verizon to maintain stable cash flows and profits in the near term. The question is whether the wireless segment EBITDA can sustain these levels that included a bump higher for this quarter.

The company made the following statement that the union strike will undoubtedly pressure costs:

However, given the status of labor contract negotiations, there will be pressure on second-quarter earnings due to the timing of cost reductions.

The key takeaway is that the recent negative sentiment due to the Yahoo bid and the union strike is likely to continue pressuring the stock until those issues conclude. The peak numbers in wireless and key wireline sectors aren't going to help Verizon rebound any time soon, but investors should not get too negative as the stock trades further down. Down at $48, the stock will trade back at an attractive 12x EPS estimates and provide investors with a solid 4.7% dividend yield.

Disclosure: I/we 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.

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