Verizon (VZ) is a provider of communications, information and entertainment products and services. The stock was down 1% during the last year and flat over the last 5 years. The company has a market capitalization of $105 billion and a debt to equity ratio of 153%. The stock has a very impressive yield of 5.4%. In this article, we will examine the company's fundamentals and perform a valuation analysis to determine if the stock is cheap at current levels.
While net income was down 16% over the last 3 years, the EPS experienced an annual growth rate of 14%. Year over year, EPS was up 63% compared to the 4% increase in revenues. Going forward, analysts expect a long term growth rate of 12.4% on par with the project growth rate of the industry. The growth rates are presented in the table below:
Next 5 Years
Profitability and Operations:
VZ's return on assets has been consistent. The company has delivered an ROA of 1% over the last 3 years which is low in my opinion. The return on equity declined from 8% to 6% over the last 3 years. Gross margins last year were 59% and were unchanged during the 3 year period. Overall, I see room for improvement when it comes to operational efficiencies. The profitability and operational metrics are shown below.
Profitability & Operations
Return on Equity
Return on Assets
To compare VZ to its competitors, key operational metrics for its peers were obtained. The peer group selected for analysis included AT&T (T), Sprint (S), Telephone & Data Systems (TDS) and Cincinnati Bell (CBB). The table below presents the peer analysis results.
As shown above, VZ appears cheap compared to its primary rivals (T and S). I would have preferred a lower debt to equity ratio, similar to that of AT&T .
Valuation analysis was performed using two methods: relative analysis, and residual income method. For relative valuation, the multiple used below was developed based on peer and broader market growth rate and multiple analysis. The relative valuation results are shown below:
Next Yr Proj EPS
EPS Growth Rate
Future EPS (5 Yr)
Price 5 Yrs Out
Current Tax Rate
Risk Free Rate
Cost of Equity
As shown above, relative valuation results indicate that the stock currently trades at its fair value.
Valuation analysis was also performed using residual income method with an analysis period of 5 years. The long term growth rate of 12.4% was also used as part of this analysis. The results are presented below.
- EPS 2012 - $2.5
- EPS 2017 - $4.2
- Long-Term Growth Rate - 12/4%
- Terminal Growth Rate - 3%
- PV of Residual Income = $6.1
- PV of Terminal Value = $17.9
- Existing Book Value = $12.7
- Intrinsic Value = $36.7
As shown above, the fair value for VZ based on residual income based model is $36.7 a share. Taking an average of my relative valuation and residual income based valuation, my fair value estimate of $35 is obtained. Including dividends, a return of 12% is possible. I would wait for VZ to trade at $30 levels before initiating a position in VZ.
Disclaimer: Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.