Source: PaxForex Premium Analytics Portal, Fundamental Insight
On April 25, Verizon Communications released its first-quarter earnings report, which showed mixed results. The telecommunications giant experienced a 2% decline in operating revenue year over year, falling short of analysts' estimates by $740 million, with $32.9 billion in revenue. Meanwhile, its adjusted earnings dropped by 11% to $1.20 per share but still exceeded the consensus forecast by $0.01.
Despite the report, Verizon's stock remained stable, but it is still over 30% lower than its all-time high in late 2020. With this in mind, should investors consider Verizon a safe investment during this bear market, or are there better telecom stocks to buy at the moment?
As of the end of 2022, Verizon held the largest market share among wireless carriers in the United States, boasting 114.5 million postpaid and prepaid phone connections. However, its wireless segment only added 201,000 postpaid phone subscribers last year, compared to AT&T's gain of nearly 2.9 million comparable subscribers.
During the first quarter of 2023, Verizon's postpaid phone subscriber base decreased by 127,000, including 263,000 consumer subscribers lost and 136,000 business subscribers gained. In contrast, AT&T added 424,000 comparable subscribers during the same period, and Verizon's postpaid phone churn rate was higher than AT&T's at 0.9% versus 0.81%. Nevertheless, Verizon's wireless revenue increased by 3% YoY to $18.9 billion due to higher business and device revenues offsetting the softness of its consumer division. The broadband business had its strongest quarterly growth in over a decade, adding 437,000 net new subscribers in Q1, mainly driven by robust demand for its fixed wireless and Fios internet services. To stabilize its wireless business, Verizon introduced aggressive promotions, new unlimited plans, and generous subsidies for popular devices. Unfortunately, these tactics resulted in a 30 basis points YoY drop in the operating margin of its consumer segment to 28.6% in Q1. The operating margin of the business segment also declined by 130 basis points to 7.4%, indicating that its recent growth was primarily driven by promotions.
Verizon's future prospects suggest that it will face ongoing challenges. The company anticipates a 2.5%-4.5% rise in total wireless revenue for the year, which implies that the segment's growth will not significantly accelerate, while its adjusted EPS is forecast to decline by 6%-12%. Analysts predict that Verizon's revenue will remain steady, but its adjusted EPS will drop by 9%.
Both Verizon and AT&T have taken on considerable debt from past acquisitions. As of Q1, Verizon's net unsecured debt-to-adjusted EBITDA ratio stood at around 2.7, which is lower than AT&T's ratio of 3.2.
Despite this debt burden, Verizon's FCF more than doubled YoY to $2.3 billion, indicating that it can easily cover its high forward dividend yield of 7%. During the conference call, CEO Hans Vestberg revealed that the company expects to see a "significant improvement" in its payout ratio as it builds on the FCF growth generated in Q1. This improvement will enable Verizon to raise its dividend and make progress toward its debt targets in the years ahead.
Verizon's stock appears to be undervalued at 8 times forward earnings, and its low valuation, FCF growth, and high yield could limit its downside potential. However, AT&T, which faces similar challenges but is growing faster than Verizon, looks even more attractive with a forward P/E of 7 and a forward yield of 6.3%.
Despite Verizon's struggles with sluggish growth in postpaid phone subscribers and margin-crushing promotions, AT&T appears to be a more logical choice for investors looking for a cheap telecom stock with an appealing dividend. Following its divestments of DirecTV and WarnerMedia, AT&T looks even more promising, making it a better option than waiting for Verizon to stabilize its wireless business.
As long as the price is above 36.50, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 38.65
- Take Profit 1: 39.50
- Take Profit 2: 41.85
Alternative scenario:
If the level of 36.50 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation:short position
- Entry point: 36.50
- Take Profit 1: 35.60
- Take Profit 2: 34.50
