VZ Stock Study (9-6-23)

Posted by Mark on November 24, 2023 at 06:22 | Last modified: September 6, 2023 14:14

I recently did a stock study on Verizon Communications Inc. (VZ) with a closing price of $34.30. The original study is here.

M* writes:

     > Verizon Communications is primarily a wireless business (it
     > provides about 70% of service revenue and nearly all
     > operating income). It serves about 92 million postpaid and
     > 22 million prepaid phone customers (following the acquisition
     > of Tracfone) via its nationwide network, making it the
     > largest U.S. wireless carrier. Fixed-line telecom operations
     > include local networks in the Northeast, which reach about
     > 25 million homes and businesses and serve about 8 million
     > broadband customers. Verizon also provides telecom services
     > nationwide to enterprise customers, often using a mixture
     > of its own and other carriers’ networks.

Over the past decade, this mega-size (> $50B revenue per year) company has grown sales and EPS at annualized rates of 0.9% and 5.0%, respectively. YOY sales declines in ’16 and ’20. EPS is up and down every other year since ’14. For me, this does not actually clear the barbed wire fence (visual inspection not “up, straight, and parallel”).

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

Over the past decade, PTPM leads peer and industry averages while ranging from 12.0% in ’14 to 24.3% in ’15 with a last-5-year mean of 18.7%. ROE also leads peer and industry averages with a last-5-year mean of 28.4% (four values from 60%-136% precede that). Debt-to-Capital is higher than peer and industry averages despite trending lower from 70.7% in ’13 to 65.9% in ’22 with a last-5-year mean of 67.9%.

Quick Ratio is 0.54, and Interest Coverage is 7.2. Value Line gives an A+ rating for Financial Strength. M* gives a “Standard” rating for Capital Allocation.

With regard to sales growth:

• CNN Business projects 1.2% YOY contraction and flat growth for ’23 and ’22-’24 (based on 22 analysts).
• YF projects YOY 2.2% contraction and 1.5% growth for ’23 and ’24, respectively (21 analysts).
• Zacks projects YOY 2.4% contraction and 1.6% growth for ’23 and ’24, respectively (7).
• Value Line projects 1.0% annualized growth from ’22-’27.
• CFRA projects contraction of 1.5% YOY and 0.1% per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 0.3% contraction per year.

I am forecasting flat sales growth: just below the long-term estimate.

With regard to EPS growth:

• CNN Business projects contraction of 9.8% YOY and 5.3% per year for ’23 and ’22-’24, respectively (based on 22 analysts), along with 5-year annualized growth of 1.3%.
• MarketWatch projects annualized contraction of 5.2% and 3.3% for ’22-’24 and ’22-’25 (27 analysts).
• Nasdaq.com projects growth of 2.0% and 3.4% per year for ’23-’25 and ’23-’26 (9, 5, and 2 analysts for ’23, ’25, ’26).
• Seeking Alpha projects 4-year annualized growth of 0.5%.
• YF projects YOY 8.9% contraction and 0.4% growth for ’23 and ’24, respectively (18), along with 5-year annualized contraction of 0.5%.
• Zacks projects YOY 8.7% contraction and 0.9% growth for ’23 and ’24, respectively (9), along with 5-year annualized growth of 3.5%.
• Value Line projects 1.8% annualized growth from ’22-’27.
• CFRA projects contraction of 10.2% YOY and 4.9% per year for ’23 and ’22-’24 along with a 3-year CAGR of -2.0%.
• M* projects long-term annualized growth of 1.1%.

I am forecasting flat EPS growth—toward the bottom of the long-term-estimate range (mean of six: 1.3%). As high EPS, I will use 2023 Q2 EPS of $5.00/share (annualized) rather than ’22 EPS of $5.06. As low EPS, I will use ’20 EPS [arbitrary] of $4.30.

My Forecast High P/E is 11.0. Over the past decade, high P/E has trended down, ranging from 7.4 in ’17 to 22.2 in ’14 with a last-5-year mean of 13.3. The last-5-year-mean average P/E is 11.7. I am forecasting below the latter and toward the bottom of the range (only ’17 is lower).

My Forecast Low P/E is 6.0. Over the past decade, low P/E has trended down, ranging from 5.8 in ’17 to 18.6 in ’14 with a last-5-year mean of 10.2. I am forecasting toward the bottom of the range (only ’17 is lower).

My Low Stock Price Forecast (LSPF) of $25.80 is default based on low EPS (see above). This is 24.8% less than the previous closing price and 17.6% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 31.7% in ’17 to 89.3% in ’14 with a last-5-year mean of 54.5%. I am forecasting below the entire range at 31.0%.

These inputs land VZ in the HOLD zone with a U/D ratio of 2.4. Total Annualized Return (TAR) is 12.7%.

PAR (using Forecast Average—not High—P/E) is 8.0%, which is decent for a mega-size company. 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 210 studies (my study and 44 outliers excluded) over the past 90 days, 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%, 12.7, 9.1, and 54.3%. I am lower across the board. Value Line’s projected average annual P/E of 13.0 is higher than MS (10.9) and mine (8.5).

MS high / low EPS are $5.58 / $4.95 vs. my $5.00 / $4.30 (per share). My EPS range is clearly lower. Value Line projects future (high) EPS of $5.65/share, which is higher than both.

MS LSPF of $32.80 implies a Forecast Low P/E of 6.6: lower than the above-stated 9.1. MS LSPF is 27.2% less than the default $4.95/share * 9.1 = $45.05 [invalid on today’s date], which results in more conservative zoning. MS LSPF remains 27.1% greater than mine [suggesting current study could be a BUY with a greater (yet still sufficiently low) LSPF].

My TAR (over 15.0% preferred) is much less than the 19.6% from MS.

MOS seems robust in the current study.

I track a couple different valuation metrics. PEG is 2.1 per Zacks [cannot be calculated based on projected P/E since my growth rate (denominator) is 0%]: slightly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is very cheap at 0.6.

VZ is a BUY under $33/share. With a forecast high price of $55.00, I estimate TAR would meet my criterion at or below $27.50/share [if I wanted to hold out that long].

Not sure exactly why I am so fascinated by such companies with lackluster and inconsistent growth. Maybe it’s when they come close to meeting stringent BUY criteria anyway. Some would call this “value investing.”