Verizon Fairly Priced With 41.8% Valuation Attractiveness Score, But Worthy Of A Premium

Sep. 24, 2022 9:17 AM ETVerizon Communications Inc. (VZ)22 Comments
Ben Clarence profile picture
Ben Clarence
609 Followers

Summary

  • This article seeks to provide a valuation and pricing comparison for VZ vs the Top Integrated, Wireless & Alternative Telecommunication Services Stocks.
  • I will provide a pricing mechanism for VZ comparing its financial metrics to the peer group, assess its financial health, and finally attempt to find an appropriate valuation method.
  • I give Verizon Communications Inc. an overall financial health score of 95.6% and a 41.8% current price attractiveness score relative to its peers.
  • VZ is ranked 25th out of the Top 60 Telecommunication Services Stocks in terms of its relative valuation attractiveness.

Daily Life In New York City Amid Coronavirus Outbreak

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Want to skip the analysis & go straight to finding out who had the best (or worst) valuations in Telecommunication Services? Download my research for free here

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.

For those unfamiliar with my analysis methodology, you'll find in-depth explanations for my research in an earlier piece relating to AT&T (T).

(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)

Verizon Communications Inc.'s Base Financial Health

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.

A screenshot of a spreadsheet with the financial metrics for Verizon

Author

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.

A screenshot of a spreadsheet with the financial metrics for Verizon

Author

Assessing Verizon Communications Inc.'s Pricing Attractiveness

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.

A screenshot of a spreadsheet with the financial metrics for Verizon

Author

Finding An Appropriate Valuation Method For Verizon Communications Inc.

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.

A screenshot of a spreadsheet with the financial metrics for Verizon

Author

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%.

A screenshot of a spreadsheet with the financial metrics for Verizon

Author

Closing Remarks

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.

This article was written by

Ben Clarence profile picture
609 Followers
Australian Finance & Economics student. I believe simple reasoning underpins good investment strategy and outcomes. I write articles based on easy-to-understand and easy-to-follow reasoning, rules and pricing firms based on fundamentals and peer analysis. I leave DCF, modelling and projections to the experts, and prefer to try and find the simplest answer(s) to the question "Is there value in this company?" Advice in my articles is general in nature and does not consider your personal circumstance. The opinions expressed 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.

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.

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