Verizon: The Year Of Investment
Summary
- Verizon reported mixed Q4 2018 results that were not well-received by the market.
- Management plans to heavily investment in what they view as Verizon's key growth driver, 5G. That is why I am calling 2019 "The Year Of Investment" for this telecom company.
- I am long Verizon, and I may get longer over the next few months.
- This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Start your free trial today »
Verizon's (NYSE:VZ) stock has been under pressure since the company reported what was widely viewed as mixed Q4 2018 operating results. The stock is down approximately 3 points since releasing results, which brings the YTD performance to -4%.
Data by YCharts
The company's recent earnings report and forward guidance were nothing to brag about, but, in my opinion, I believe that Verizon will be well-positioned for the future after the "Year of Investment".
The Latest, The Good (But Not Great) Quarter and Fiscal Year
On January 29, 2019, Verizon reported Q4 2018 results that beat on the bottom line but that missed the top-line estimates. The company reported Q4 2018 EPS of $1.12 (beat by $0.03) on revenue of $34.3B (missed by $160M), which were largely viewed as mixed results. However, the full-year figures were improvements when compared to the prior year.
Source: Q4 and Full-year 2018 Earnings Presentation
The following were the operating highlights from the last quarter of 2018:
- 1.2M retail postpaid net additions and retail postpaid churn of 1.08%
- 54K Fios internet net additions with Fios total revenue growth coming in at 2.9% YoY
- a reduction in total debt (will discuss below)
- strong cash flow metrics (will discuss below)
The $4.6B write-down for Oath, or should I say Verizon Media (the operating segment was recently rebranded), has garnered the most attention, and rightfully so, as Verizon only recently acquired most of these media assets (AOL in 2015 and Yahoo in 2017). However, in my mind, it makes sense for Verizon to focus on its bread and butter and not spend valuable resources on these long-shot bets. As such, I view the write-down as a necessary evil; however, I do not believe that the media assets are worthless, so let's give the company some time to see if they are able to monetize these businesses in the quarters ahead.
Another important point to make is that Verizon's management team has been serious about reducing the debt balance. For example, the company's total debt is down by approximately $4B, or 3.5%, YoY.
Source: Q4 and Full-year 2018 Supplemental Financial Report
Pension obligations are also down significantly when compared to the prior fiscal year. Management definitely still has some work to do when it comes to Verizon's stretched financial position, but, all things considered, this company is heading in the right direction. Moreover, as I recently described, this company has more than enough cash flow to service its debt.
To this point, Verizon ended 2018 in a significantly better position from a cash flow perspective than it did in the previous year.
Source: Q4 and Full-year 2018 Earnings Presentation
As shown, the company's net debt to adjusted EBITDA came in at 2.3x, which is a material improvement from the 2.6x that was reported at the end of 2017. Additionally, cash flow from operations and free cash flow grew YoY by 41% and 150%, respectively.
At the end of the day, there was a lot to like about Verizon's Q4 and Full-year 2018 results, but I believe that the concerns (i.e., 2019 is going to be a heavy investment year) are legitimate. Investors will have to play the waiting game while collecting a rich dividend, as Verizon's management team navigates this company through a potentially transformational (and expensive) year.
The Future Looks Brighter (Kind Of) - The Year Of Investment
Management has been consistent about what they view as Verizon's strategic priorities for the upcoming year.
Source: Q4 and Full-year 2018 Earnings Presentation
The Customer, Financials, and Society strategic priorities are pretty straightforward, and Employees, or Verizon 2.0, is related to the restructuring efforts that were previously announced. I believe that 2019 (and likely the next few years) for Verizon will largely revolve around 5G.
And make no mistake about it, Verizon is laser-focused on maintaining its leadership position in the 5G space. Management said it best during the conference call:
2018 was a year of 5G firsts. We were first to complete an overlay of data transmission on the 5G global standards. We were first to complete the first 5G data session on a smartphone. And in October, we proudly were the first in the world to commercially deploy 5G with our 5G Home product. As is seen in the year, our confidence is high as we're heading to the 5G era and the beginning of what many sees as the fourth industrial revolution.
- Hans Vestberg, CEO, Q4 2018 Conference Call
5G is the future so, in my opinion, this company is indeed focusing in the right area. Looking ahead, management did, however, mention several headwinds (revenue recognition, lease accounting standard change, and taxes) in the conference call, but they still provided good (not great) guidance for 2019:
- Low single-digit consolidated revenue growth,
- Organic earnings growth, but 2019 EPS in line with fiscal 2018 (i.e., no growth);
- CapEx to be in the range of $17-18B.
Simply put, 2019 is shaping up to be an investment year for Verizon, so investors should begin to bake that into their expectations. It helps the bull case for Verizon that its biggest competitor, AT&T (T), continues to struggle to impress the market (e.g., T shares are down over 4% today on "poor" results). I do, however, expect VZ shares to be range-bound over the next few quarters.
Valuation
VZ shares are trading at a premium when compared to AT&T's stock.
Data by YCharts
However, it should be noted that AT&T cannot seem to get out of its own way and is currently facing several significant headwinds. Therefore, T shares are trading at depressed levels for a reason. On the other hand, Verizon at 11x forward earnings is what I would consider an attractive valuation. Moreover, VZ shares are trading at decent levels based on its own historical metrics.
Data by YCharts
5G is the future, and I believe that investors will begin to see Verizon's long-term business prospect in this area over the next two-plus years. As such, I believe that VZ shares will turn out to be a great long-term buy at today's price, if you are willing (and able) to be patient.
Risks
Verizon's [growing] debt balance and its cash flow prospects are by far the two most significant risk factors to consider/monitor in 2019. If the cash flow metrics deteriorate over the next few quarters, I believe that Verizon's stock will face downward pressure, especially given the fact that the company plans to heavily invest in other areas (e.g., 5G rollout) over the next 12-18 months.
Bottom Line
The main takeaway from Verizon's Q4 and full-year 2018 results is the fact that this company is allocating capital in the right areas. 5G will make or break Verizon, so management putting the company's money to work in this potentially key growth driver makes a ton of sense. Will VZ shares remain under pressure during this year of investment? Likely. But I believe that investors that are able to play the waiting game will be richly rewarded in late 2019 and beyond. Therefore, investors should be excited about what 2019 may bring for Verizon (and its shareholders).
Author's Note: I am long both Verizon and AT&T in my R.I.P. portfolio, and I have no plans to reduce my holdings in either company.
Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.
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Disclosure: I am/we are long VZ, T. 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.