Is Verizon stock a buying opportunity? (NYSE:VZ)

elevator pitch

of Verizon Communications Inc. (New York Stock Exchange: VZ) in stock as a buy.

A previous August 4, 2022 Verizon update focused on a -10% price cut to the company’s stock in July 2022. In our previous article, it is down -18.1% compared to the S&P 500’s relatively modest -11.6% decline over the same timeframe. This article answers the question of whether there is a buying opportunity for Verizon right now.

I think now is the time to buy Verizon stock. VZ’s valuation has become more attractive following the stock price correction over the past year. Verizon’s outlook looks good as we don’t expect Verizon to underperform its third quarter earnings guidance or lower its 2022 guidance again. Long term, VZ should be a stock with lower financial risk and higher return on equity. Given these factors, we’ve raised Verizon’s rating from Hold to Buy.

VZ Stock Key Indicators

Verizon will release its third quarter 2022 financial results next week on October 21, 2022. As such, the key metric to monitor VZ is the company’s sell-side consensus financial projections to determine if Verizon is at risk of achieving the third quarter. revenue error.

Wall Street consensus normalized earnings per share or EPS for Verizon in the third quarter of 2022 fell sharply -7.1% over the past six months. Additionally, more than half of the 29 sell-side analysts, or 17, have lowered VZ’s third quarter normalized EPS forecast in the last three months.

Specifically, the consensus numbers show that VZ will generate a normalized EPS of $1.29 in the third quarter of 2022. This means that Verizon’s revenue is expected to decline -8.8% year-over-year in the third quarter of 2022. This is worse than the company’s -4.4% year-over-year decline in his EPS in Q2 2022.

In summary, most of the Wall Street analysts covering VZ’s stock have lowered their financial forecasts for the company, with Verizon projecting a contraction in its third quarter 2022 net income compared to the second quarter of 2022. I expect to report. In other words, the market’s expectations for Verizon’s third-quarter financial performance are modest, suggesting that his VZ is much less likely to miss out on serious gains. As such, a further correction in Verizon’s stock price in response to disappointing third-quarter earnings is unlikely.

Nonetheless, we still need to understand why Verizon’s stock has underperformed in recent months. This will be explained in the next section.

Why is Verizon stock falling?

At the beginning of this article, I emphasized that VZ’s stock has fallen -18.1% since I wrote my previous article. In fact, Verizon’s stock has fallen even more significantly -29.1% over the past year. Over the same timeframe, the broader market, represented by the S&P 500, corrected at a more moderate -15.9%.

There are several reasons for the decline in Verizon’s stock price.

The first reason is that investors have lost confidence in VZ as a result of the company’s management guidance updates provided when it announced its first quarter 2022 and second quarter 2022 financial results.

When Verizon reported its first-quarter earnings in late April, the company said it expected “wireless service revenue growth,” “adjusted EBITDA growth,” and “adjusted EPS” for the full year of fiscal 2022 to be at “lower bounds.” We emphasized that it is expected to be in of’ earlier guidance. When VZ announced its second quarter 2022 results on July 22, 2022, he lowered guidance for all key metrics such as top line, operating profit and bottom line.

The second reason is that the market is concerned about Verizon’s earnings resilience in an environment of slow economic growth and low consumer confidence.

In particular, VZ mentioned in BofA (BAC) 2022 Media Communications & Entertainment Conference (September 8, 2022) said, “We need to look after our customers” along with “financial background” because “customers are feeling pain in their monthly bills”. ‘ said. Verizon’s peer AT&T (T) also goldman sachs (GS) The Communacopia + Technology Conference on Sept. 12, 2022 said there has been no “further deterioration from what was seen earlier in the year” but there has been an “extension of payment cycles” for subscribers.

A third reason is Verizon’s concessions to its competitors.

according to Moffett Nathanson Sell-side research report cited on August 12, 2022 fierce wireless According to the article, VZ has “lost market share every quarter since Q2 of 2020.” This is a view validated by Verizon’s operational metrics. In the second quarter of 2022, Verizon added about 12,000 postpaid phone net additions. AT&T, by contrast, posted more than +800,000 postpaid phone net additions in the most recent quarter.

The next section touches on Verizon’s valuation in the light of the company’s stock price decline over the past year.

Are VZ shares valued fairly?

VZ’s stock price is undervalued.

Verizon is currently trading at a consensus of 7.1 times its normalized P/E over the next 12 months, according to valuation data obtained from. S&P Capital IQThe stock is currently trading at a -45% discount to a 15-year average P/E multiple of 13.0x.

VZ’s next 12-month consensus dividend yield forecast of 7.1% is attractive and +45% higher than its 15-year average forecast dividend yield of 4.9%.

Is Now a Buying Opportunity for Verizon?

I think Verizon is a buying opportunity now.

As explained in the previous section, VZ’s current valuation has priced in much of the stock’s downside, and the risk of missing out on the company’s Q3 2022 earnings is low.

There are two other factors that play a large role in evaluating Verizon as a viable investment candidate.

One factor is that, unlike what happened in its Q1 2022 and Q2 2022 earnings calls, Verizon will not provide full-year 2022 operating guidance when it reports its Q3 2022 earnings next week. Do not change.

At the company’s latest investor event, goldman sachs (GS) At the Communacopia + Technology Conference on September 14, 2022, VZ revealed that “two months into the quarter (Q3 2022), we’re clearly seeing an increase in total ads,” adding that “every month We are growing,” he stressed. In my view, this seems to mean that Verizon performed pretty much as expected for most of the third quarter and the trend looks positive.

Another factor is that Verizon stands out as a relatively defensive choice in the current market.

VZ’s position as a purely domestic play, apart from its ongoing subscription revenue stream, is a significant plus. Unlike many other publicly traded stocks, Verizon is immune to major headwinds such as his COVID-zero policy in China, economic and energy problems in Europe, and a strong US dollar.

What’s your long-term outlook for Verizon stock?

Verizon’s key long-term forecasts relate to the company’s capital management and capital allocation.

At the company’s Investor Day in March, VZ emphasized that the company needs to achieve a “target leverage ratio of 1.75x to 2x by 2025,” adding, I will consider buying it,” he said. For reference, Verizon’s net leverage ratio is 2.7x as of June 30, 2022.

As previously mentioned, VZ currently offers a very attractive high single-digit dividend yield. The stock’s potential future shareholder return yield (the sum of dividends and buybacks divided by market capitalization) is implied by the company’s intent to begin share buybacks as its financial leverage drops to more comfortable levels. It can be even more attractive because

In a nutshell, Verizon’s long-term capital management and capital allocation goals suggest that VZ’s investment attractiveness will continue to grow. This is because Verizon will become less leveraged and boast higher levels of return on equity over time.

Should I buy, sell or hold VZ shares?

Buy VZ stock. Verizon’s valuation is well-behaved relative to historical averages, and we don’t expect any negative surprises in the form of weaker-than-expected Q3 earnings or lower guidance for 2022. increase.