Source: PaxForex Premium Analytics Portal, Fundamental Insight
Verizon just had one of its worst days in a long time, and its stock is down 10%.
While rival AT&T freed itself from the burden of its Warner Media division to now concentrate on its telecom business, VZ posted an earnings report that was disappointing, to say the least.
The company is losing customers while AT&T is attracting them, revenue growth is now projected to be low compared to previous projections, profits are falling, and the broader problems facing the rest of the economy -- uncontrolled inflation, rising labor costs, rising fuel and electricity prices -- are also hitting the carrier hard.
Nevertheless, Verizon stock is currently at levels it hasn't been at since 2018, and as the stock trades at nine times earnings estimates and eight times next year's forecast, is it time to buy the telecom company's stock?
Verizon is the largest wireless network in the U.S., with 91.4 million postpaid phone connections and 23.8 million prepaid connections. Its network also serves as the basis for Comcast and Charter Communications' virtual mobile network operations (MVNOs).
Despite losing customers this quarter (which was much better than a year ago), the company's business segment added 256,000 net postpaid subscribers, which helped reduce its overall loss to 36,000, much better than Wall Street's forecast of a loss of 100,000 subscribers.
The average revenue per account (ARPA) rose 2.6% to $123.96, and total wireless revenue increased 9.5% to $18.3 billion, though this was partly the result of the addition of 20 million Tracfone prepaid subscribers acquired from America Movil.
Verizon could also be one of the biggest beneficiaries of the move to 5G networks, which will greatly increase data download and upload speeds. The company has the most spectrum in the sub-6 gigahertz range, where 5G networks will be used first and is a leader in millimeter-wave, where the industry will eventually grow.
The company also continues to extend its home Internet offerings with its fixed wireless assets. The company added 112,000 subscribers in the first quarter, up 2.5 times from the fourth quarter.
While Verizon was able to make up for most of its customer loss through its business operations, AT&T pulled ahead, adding 965,000 postpaid subscribers, and T-Mobile added 589,000 subscribers, both surpassing forecasts.
AT&T has also been very active in acquiring sub-6 GHz spectrum licenses and now has almost as many as Verizon. Both AT&T and T-Mobile will be able to immediately deploy the 3.45 GHz spectrum they won in an auction last year, while Verizon dropped out of the bidding early.
This C-band spectrum is considered the sweet spot of 5G wireless, and since much of it will not be available until existing satellite carriers using this spectrum move to another spectrum -- which won't happen until 2023 -- Verizon might be forced to play catch-up.
Verizon also has $140 billion in long-term debt, and servicing that debt reduces the investment the company could make in its business. Chief Financial Officer Matt Ellis said the Federal Reserve's plan to aggressively raise interest rates could increase Verizon's cash outlay for interest on that debt by another $150 million to $200 million above projections.
Despite all its problems, Verizon continues to grow, with Q1 revenue up 2 percent to $33.6 billion. The company also paid out $2.6 billion in dividends. Payments of $0.64 per share are now yielding 5.3 percent annually, on par with what AT&T is paying after the Warner Media divestiture.
Given that the stock is trading at less than twice its sales and 17 times the free cash flow it produces -- the telecommunications company has long been a cash-generating machine -- it looks like a well-discounted stock to buy at those prices.
While investors realize that the days of high growth are likely behind us (although the 5G rollout may give the near future a little Wild West charm), Verizon is likely to be a fairly stable telecom stock for years to come.
As long as the price is below the 50.50 level, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 47.10
- Take Profit 1: 45.30
- Take Profit 2: 43.00
Alternative scenario:
If the level of 50.50 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 50.50
- Take Profit 1: 54.50
- Take Profit 2: 57.00
