VZ Stock Study (4-6-23)

I recently did a stock study on Verizon Communications Inc. (VZ) with a closing price of $39.46.

CFRA writes:

     > VZ provides communication, information, and entertainment
     > products and services to consumers, businesses, and
     > government entities. VZ has two reportable segments that
     > it operates and manages as strategic business units;
     > Verizon Consumer Group (71% of consolidated revenue in
     > 2021) and Verizon Business Group (23%).

Despite the popularity and brand recognition, where’s the love for Verizon?

For starters, this mega-sized (> $50B revenue per year) company has grown sales and EPS at annualized rates of 0.9% and 5.0%, respectively, over the last 10 years. Sales is flat with dips in ’16, ’17, and ’20. EPS is up and down every other year since ’14. I really don’t think this company gets past the barbed wire fence (visual inspection).

Nevertheless [in the spirit of MMM], I will proceed to see how this pans out.

PTPM is better than peer and industry averages ranging from 18%-22% since ’15 with a last-5-year average of 18.7%.

ROE—over 24% for the last decade with a last-5-year average of 28.4%—is also better than peer and industry averages.

Debt-to-Capital is uncomfortably high and worse than peer and industry averages. The last-5-year average is 67.9% and although the 0.54 Quick Ratio may raise a red flag, Interest Coverage is 8.8. Value Line gives an A++ rating for Financial Strength. M* gives a Standard rating for Capital Allocation and writes, “VZ’s balance sheet is… reasonably solid… with net debt at 2.8 times EBITDA… roughly comparable to its major wireless rivals and major fixed-line competitor CMCSA.”

I forecast flat long-term annualized sales growth based on the following:

• CNN Business projects 0.4% YOY and 0.8% per year for ’23 and ’22-’24 (based on 21 analysts).
• YF projects YOY 0.4% and 1.1% for ’23 and ’24, respectively (23 analysts).
• Zacks projects YOY 0.6% and 1.2% for ’23 and ’24, respectively (8).
• Value Line projects 1.4% annualized growth from ’22-’27.
• CFRA projects 0.5% YOY and 1% per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 0.7% annualized growth.

I am forecasting just below the entire range.

I forecast flat long-term annualized EPS growth based on the following:

• CNN Business projects contraction of 9.3% YOY and 4.5% per year for ’23 and ’22-’24, respectively (based on 21 analysts), along with 5-year annualized growth of 1%.
• MarketWatch projects annualized contraction of 4.5% and 2.4% for ’22-’24 and ’22-’25 (27 analysts).
• Nasdaq.com projects growth of 4.9% YOY and 4.1% per year for ’24 and ’23-’25, respectively (10, 4, and 2 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized contraction of 0.2%.
• YF projects YOY 9.3% contraction and 0.4% growth for ’23 and ’24, respectively (21), along with 5-year annualized growth of 0.1%.
• Zacks projects YOY 9.5% contraction and 2.1% growth for ’23 and ’24, respectively (10), along with 5-year annualized growth of 4.2%.
• Value Line projects 2.5% annualized growth from ’22-’27.
• CFRA projects contraction of 9.5% YOY and 3.8% per year for ’23 and ’22-’24.
• M* projects long-term annualized growth of 1.2%.

I am forecasting toward the bottom of the long-term-estimate range (mean of six: 1.5%).

My Forecast High P/E is 10. Over the last 10 years, high P/E has generally trended down with a range from 7.4 in ’17 to 22.2 in ’14 and a last-5-year average of 13.3. I am forecasting toward the bottom of the range (only ’17 is lower).

My Forecast Low P/E is 6. Over the last 10 years, low P/E has generally trended down with a range from 5.8 in ’17 to 18.6 in ’14 and a last-5-year average of 10.2. I am forecasting toward the bottom of the range (only ’17 is lower).

My Low Stock Price Forecast (LSPF) is the default value of $30.40. This is 23% less than the previous closing price and 7.3% less than the 52-week low.

Over the last 10 years, Payout Ratio has ranged from 31.7% in ’17 to 89.3% in ’14 and a last-5-year average of 54.5%. I am forecasting below the entire range at 31%.

These inputs land VZ in the HOLD zone with an U/D ratio of 1.1. The Total Annualized Return (TAR) is 7.9%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-sized company at 4.1%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 217 studies done in the past 90 days (my study along with 81 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 1.6%, 2.0%, 13.0, 9.7, and 54.5%. I am lower across the board. Value Line projects a future average annual P/E of 17.5, which is much higher than MS (11.4) and me (8.0). I usually forecast P/E compression, but as a mature company that may not happen. The result is a higher MOS.

With regard to other data, MS high and low EPS are $5.59 and $4.85 compared to my $5.06. MS has a LSPF of $34.50, which is 13.5% above mine. Per usual, this is lower than MS default $4.85 * 9.7 = $47.04 [curiously, this would be INVALID].

The Current Yield of 6.4% is a boon for dividend investors and would be even higher with the stock under $35/share. This is where I would look to enter given the MOS behind the study.