Verizon Communications (VZ) is a US based telecommunications company providing communication services to consumers, businesses and governments on a global basis. The company is listed in the S&P 500 index and has a market capitalization of $128 billion, revenues of $112 billion and income of $2.65 billion.
Like AT&T (T) the company ran up pretty consistently since April with shares currently trading at $45.21. Since the overall stock market picture is not that pretty, it is quite remarkable how strong the telecommunication companies performed when faced with generally adverse conditions in the equity markets. Increased publicity about Greece and Spain sent stock markets lower globally in the second quarter and the Euro currency came under pressure as well. As defensive companies, telecommunication providers are sought after in times of crisis, as they exhibit recession-proof business models that allow them to keep dividends high throughout the business cycle.
Since I bought a couple of European telecoms - such as Telefonica (TEF) for myself a few month ago - I found it to be interesting that US based telecoms perform significantly stronger than their European counterparts which I attribute to the present news coverage of the European debt situation.
Verizon for example is up 17% this year alone which is remarkable given the overall uncertainty in the markets. Even though some investors have missed out on significant capital gains over the last 3 month, is Verizon still a buy at $45?
Let's look at what analysts estimate: Analyst average 2013 EPS estimates stand at $2.79 per share, which I consider to be too pessimistic. I estimate an EPS of $3.1 per share (based on historical profitability and core earnings growth), which yields an intrinsic value of $62 a share. In this scenario I have used a multiple of 20x earnings to account for the strength of VZ's business and technology know-how. In addition, patient investors get to collect a solid 4.4% dividend on the way.
A defensive company such as VZ, AT&T or Vodafone (VOD) generate huge amounts of free cash flow from their business, which mainly results from low marginal costs. VZ or any other telecommunication company would be suitable for long-term oriented investors who appreciate stability in their portfolio. Since the undervaluation is quite significant, investors should be patient for the investment thesis to play out and the share price meet our intrinsic value target. Investors in Verizon should be well positioned in case economic conditions worsen and the resilience of business models are put to test.
Disclosure: I am long T.