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While the Fed crash-dives the economy toward a recession, investors have fled any firms that appear to be valued based on growth prospects rather than historic performance and established value.
One sector to be hit particularly hard is the communications sector, which was already filled with overvalued software and entertainment stocks. But within the Communications sector is the telecommunications industry, with plenty of established investment-grade firms with plenty of value to be found, pulled down by the broader communications sector pessimism. This is all despite the opportunities presented by 5G technology roll-outs, an economy pulling itself back together post-COVID and decentralized funding of broadband infrastructure in the US.
We'll be hunting for investment-worthy opportunities within the industry and assessing some of the larger firms for mispricings.
This particular analysis will be considering telecommunications behemoth Verizon Communications Inc. (NYSE:VZ), to assess if one of the largest telecomms firms in the country has been correctly valued by the market.
(Data & prices correct as of pre-market 20th September, 2022)
(Top Integrated, Wireless & Alternative Telecommunication Services Stocks referred to can be found on this Seeking Alpha screener)
Considering the balance sheet for VZ, the only noteworthy item of any concern is the large debt level (205% debt to equity), however, this is all long-term debt, so the structure of this debt is not overly worrying.
Of course, a firm of this size would struggle to pass a quick ratio given the sheer scale of the organization, however this is a worst-case scenario test, and I don't believe this should worry us greatly.
VZ scores an excellent 95.6% overall financial health thanks to excellent metrics across the board, the only areas for improvement would be the debt level, however this is not critical.
Next we broadly assess VZ's valuation metrics compared to the rest of the industry to get a sense of how the firm's pricing might appeal to investors.
Across the list of metrics VZ appears to be fairly valued, and a premium has been applied based on the Book Value of assets.
Finally we look to assign a price to VZ by assessing the correct pricing mechanism the market has used to value firms within the industry.
We can re-use our past work where we found the mix of valuation metrics that provided a best fit, saving us some time, but it still pays to eyeball the normal and abnormal valuation metrics.
We can see that the market has fairly valued VZ according to our pricing mechanism, where we compute a fair price of $43.94, implying an upside of 6.55%.
Setting out to find a price for VZ, I expected that we would find the firm was "overpriced" according to my methodology, however to find VZ considered "fairly priced" is an opportunity in itself given the scale and market share of the firm should command a premium price.
I would rate VZ as a Buy and expect investors could set a premium price target in-line with the P/E implied price of $61.59 (upside 49%), due to the scale and market share of the firm, and the near-perfect balance sheet compared to the industry peer group.
With that said, it would be irresponsible of me not to point out that this analysis is limited in its scope to just a quantitative peer analysis. While we do look at the firms financials, it does not go searching for detail and context that one might find reading earnings transcripts. Further, the analysis is of the industry as a whole but does not consider the market as a whole (ie, the S&P 500) and does not break down a near-peer comparison. Investors should use this analysis as perhaps a base-line for their analysis, but spend time looking at the firm's qualitative aspects to further inform their thinking.
Author's Note: The commentary in this article is general in nature and does not consider your personal circumstance. The opinions expressed in this article are opinions only, and data referenced is sourced from third party sources including Seeking Alpha and other publicly available sources.
I make no warranties or guarantees around any of the views expressed in this article and suggest all investors consider my writing to be for interest purposes only and not considered exhaustive investment research or advice.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.