With Verizon Communications' (VZ) strong year-to-date performance of nearly 9%, coupled with a dividend yield of around 4%, most investors have been more than satisfied with their Verizon shares. In the past few weeks, however, Verizon has fallen nearly 9%. Through this article, I will present my case wherein I believe the recent pullback in Verizon's share price represents a solid buying opportunity into a fundamentally solid organization.
Revenue: The Fuel of Growth
All companies are driven by revenue. Without revenue, it is impossible to run a business. Revenue is essentially the income of the firm, and as can be seen in the chart below, Verizon is experiencing solid growth in its revenue.
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As the chart clearly shows, for the past 10 years, Verizon has been aggressively growing its revenue base. Since 2006, it has nearly doubled its quarterly revenue from $15 billion to $28 billion. This growth is more noteworthy in that in only eight of the previous 40 quarters, Verizon has failed to grow its revenues. This can graphically be seen in the chart below.
Notice that the revenue growth rate of Verizon has been consistently positive for the past 10 years. Practically, this means that the firm is growing its market share, and it is consistently expanding its operations. This ultimately enables the firm to be in a position to continue growth going into the future.
Viewed in isolation, revenues are slightly irrelevant. Revenues must be put into perspective by comparing them to the expenses required to generate the revenues. After all, if a firm has $1 billion in revenues, but incurs $2 billion in expenses to generate these revenues, the firm could soon be struggling. The chart below shows the expenses that Verizon has incurred to produce such consistent revenue growth:
As can clearly be seen, Verizon is generating its consistent revenue growth through consistent expense growth. What this tells us as analysts is that the growth of the firm has been due to business level decisions more than the economic environment. In other words, the way that Verizon has been choosing to spend its capital has led to revenue growth rather than Verizon simply benefiting from the economic business cycle. Basically, Verizon has been actively taking charge of the financial condition of the firm, and its growth has been primarily based upon its decisions rather than the boom and bust of the economy.
Margins are Key
By studying revenues and expenses, we can gain an understanding into the growth of a firm. Additionally, we can put this growth into perspective by determining if the firm is consciously spending its capital to generate revenues or if it is simply benefiting from the economic state of the world as a whole. For the past 10 years, Verizon has consistently been the arbiter of its financial condition and has shown that its business model successfully generates growth for the firm.
To bring the two elements of revenues and expenses together, we can examine profit margin. Profit margin is essentially the percentage of revenues that the firm is able to keep at the end of a business period after accounting for the expenses required to generate the revenues. The chart below shows the profit margins of Verizon for the past 10 years:
This chart shows that Verizon is a solidly profitable firm. For the past 10 years, Verizon has only had 4 quarters in which it was unprofitable. To say it another way, 90% of the time, Verizon earns a solid profit in a given quarter. Additionally, the consistency of profitability is very noteworthy - Verizon frequently earns a profit margin of over 5%, which means that it is able to, on average, keep 5% of every dollar of revenue to invest in future growth and reward shareholders through dividends.
Verizon is in a fundamentally-solid position. It has been steadily increasing its revenue, which demonstrates a strong growth in market share, as well as a business model that succeeds in bringing customers into the firm. Through examining its expenses, it can be seen that Verizon has been benefiting from firm-level decisions, rather than simply relying on the economic state of the world for its revenues. Through its profit margins, it can clearly been seen that Verizon is a solidly-profitable firm that is in the position to continue its growth and expansion.
Despite the fact that Verizon is fundamentally sound, the share price of Verizon has been falling for the past two months. Since mid-July, Verizon has fallen 9% from its yearly-peak. In my opinion, there is no fundamental basis for this decline in share price. As we have already seen, Verizon is a fundamentally strong organization that has consistently grown for the past 10 years. I believe that this decline in share price represents a solid buying opportunity. Since price is diverging from the fundamental condition of the firm, prudent investors can purchase the shares and profit from a resumption in the uptrend of the stock. In order to capitalize on this opportunity, I believe that we should execute our investment technically. This said, I have included a chart of the past few months of trading data to show the key price level for this analysis.
The chart shows that traders have fought over the $43.25 level for the past quarter. In mid-June and in late-July, price found support at this level. In the past week, price has tried and failed to overcome this level. As soon as prices are able to break through this level of resistance, I believe that investors who are interested in Verizon should purchase. Since this price level has been contested for the past three months, a break of this level shows significance in that it indicates that the bulls are once again in charge. This said, I view $43.25 as the level at which to participate in buying into Verizon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.