The deal to acquire Yahoo! should close next month, so it VZ going to VZoom!?
Key Stats for Verizon Communications Inc.
| Ticker | VZ |
|---|---|
| Sector | Integrated Telecommunications Services |
| Latest price | $45.84 |
| Value | $186,998M |
| Daily vol | $710M |
| Date | 15 May 2017 |
| Links | Yahoo Finance, SEC Edgar, verizon.com |
1. What do they do?
Verizon Communications is a telecom play with some "entertainment" assets to boot. Serving pretty much all types of people, companies, businesses and governments... they divide their business metrics into three areas:
- Wireless (i.e. cell phones)
- Wireline (i.e. broadband)
- Corporate & Other (i.e. digital assets, telematic, etc)
Seems very old school, to have wireless and wireline separate, seem to be ex-growth. I thought they had the different lines when there were wildly different outlooks! But here's the breakdown
| 2016 | Sales | Growth | Operating profit |
|---|---|---|---|
| Wireless | $89bn | -2.7% | $30bn |
| Wireline | $31bn | -2.3% | $0bn |
| Corporate & Other | $7bn | NA | -$2bn |
Sadly, Other is a real ragbag, with divestitures and acquisitions hiding in here.
And even more weird is the total lack of profitability in the Wireline business.
And the numbers overall?
It's hard to get excited about the operational performance of the business. Revenues are going anywhere, and the "management discussion" seems to make up excuses for why it's hard to growth the top line or maintain margin.
| Metric | 2016A | 2015A | 2014A | 2013A | 2012A |
|---|---|---|---|---|---|
| Revenue | $126bn | $132bn | $127bn | $121bn | $116bn |
| EPS | $3.21 | $4.37 | $2.42 | $4.00 | $0.31 |
| DPS | $2.29 | $2.23 | $2.16 | $2.09 | $2.03 |
They folks have gone from monopoly (fixed line phones) to oligopoly (limited no. of cell phone companies) to disrupted industry (as the internet eats their lunch).
Sadly the work "synergy" doesn't appear in the annual report once :( And when the mention "innovation" (once) it's referring to their partners developing the next generation of wireless technology. :(
Happy shareholders?
We'll the dividend keeps ticking up, and this year the forecast is for $2.33 versus earnings of $3.77, so can't see complaints there. Plus they happily buy stock back.
On the balance sheet, depreciation is higher than capex in Wireline segment, so the capital base is shrinking there, thankfully since it's the zero margin unit, and it's the inverse for the Wireless segment, thankfully too...
... as for debts, $112 billon of net debt sounds scary but that is "just" 2.7x it's latest operating profit. Which is fine for a cash cow telecom play.
- How do they compare?
By now, merger after merger, T and VZ have the US market largely sown up. Though bizarrely neither has made much of a push internationally. Perhaps they know at their core there telecoms are really just another utility, and utilities by their nature have limited synergies on a global basis? And that focus has stood to them, with margins and returns at the top of the peer group.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Verizon Communications | $123,623M | 34% | 58% |
| AT&T | $162,616M | 31% | 10% |
| T-Mobile US | $38,256M | 25% | 9% |
| Sprint Corp | $33,347M | 31% | -6% |
| Comcast Corp | $82,076M | 33% | 17% |
| Charter Communications | $36,637M | 38% | 20% |
| America Movil (ADR) | $54,052M | 26% | 5% |
And despite those nice numbers, the lack of growth is keeping the stock back! Just 12 times forecast earnings.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield |
|---|---|---|---|---|
| VZ | $186,998M | 12x | 1% | 5% |
| T | $236,637M | 13x | 8% | 5% |
| TMUS.O | $54,461M | 32x | 20% | 0% |
| S | $31,698M | -137x | N/A | 0% |
| CMCSA.O | $184,881M | 20x | 12% | 2% |
| CHTR.O | $86,147M | 68x | 4% | 0% |
| AMX | $50,788M | 17x | N/A | 2% |
That leaves the stop with an attractive dividend yield, and low double digit valuation. In fact, if we compare the telecom sector to utilities... telecoms has a higher yield, i.e. is cheaper, despite a slightly higher forecast growth rate!
3. What does Wall Street thinks?
The professionals on Wall Street have a $50.52 for VZ, that's a 10% upside, but their recommendation to clients is Hold. Looking back two years, Wall Street were Buyers from $45 all the way to $55, and then they turned on VZ, with pretty good timing.
Valuation went from 11x forecast earnings to 14x and back again. So it feels like the brokers might be over cautious at 12x earnings. Though with forecast earnings continuing to see pressure, maybe some fence sitting is right!
As for Yahoo! I can't but help feel it's a sideshow. It's hard not to see it getting lost in the overall figures. Only a miracle of synergies, innovation and 100%+ cashflow margins could have an impact ;)
4. Well, am I taking their call?
If you are chasing yield, it's hard not to like VZ's 5.1% forecast yield. Sure the industry is under constant attack, and there's chance they do another nutty M&A deal, ala Yahoo! but those deals are largely lost in the overall supertanker that is Wireless / Wireline telecoms.
If I'd no telecom or utility stocks in my portfolio, and if I wanted one, it's hard to fault VZ, but it feels like more of a portfolio diversification purchase, than a stock pick. So am passing and looking elsewhere.
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Disclosure: I have no position in any of the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author notes: u/shane_stockflare works at a financial website, Stockflare, and is a Chartered Financial Analyst.
Submitted May 15, 2017 at 06:32PM by shane_stockflare http://ift.tt/2rk7iSa
