Verizon Communications Inc. (NYSE:VZ) is a company I am sure most of you are very familiar with — whether it’s because you are a customer or you simply remember the “Can you hear me now?” commercials from the early 2000s. VZ stock is the largest provider of wireless telephone services in the United States, with Ebitda (earnings before interest, taxes, depreciation and amortization) in the trailing twelve months of $39 billion.
Verizon made several small acquisitions last year to diversify itself beyond its telephone businesses, the most notable of which was the purchase of internet media company AOL.
It also bought several Internet of Things (IoT) companies, such as Fleetmatics, which provides improved communication and data analytics for trucking fleets. While none of these companies were large enough to have an immediately meaningful impact on VZ’s results, additional acquisitions on top of internal growth could add to their significance over time.
VZ stock has been under pressure since releasing quarterly earnings on April 20 that just missed the mark at a penny shy of expectations. It’s also been hurt by analyst downgrades based on the numbers and additional concerns about more price declines in the future.
While these concerns are important to keep in mind, I continue to see significant value here as earnings should start to stabilize later in the year. Nearly all of the 11 cents in per-share earnings decline in the first quarter (95 cents versus last year’s $1.06) was due to the sale of wireline assets to Frontier Communications Corp (NASDAQ:FTR), and the remaining wireline segment, which accounts for 20% of operating income, is beginning to stabilize and should do well with growth businesses like FIOS.
As for the wireless business, VZ stock will soon see the negative impact of subsidizing phone costs end, paving the way for a good year of full price hardware sales in the second half with the introduction of the iPhone 8.
And while the downside of its unlimited data offering will weigh on the company through year-end, consumers have responded favorably to the change and it should be a boon for VZ stock over the longer term. Even at a slight adjustment to this year’s EPS estimates from $3.86 to $3.77, the stock still sells for just 15 times earnings, so I continue to see value here.
What I think investors are missing is that margin pressure from hardware will be less of an issue in the future, as the last of the subsidized phone purchase contracts end later this year.
If it appears interest rates are headed meaningfully higher, VZ stock may not be worth holding on to. But with its 5% dividend yield secure, I expect to see more value investors surface with the earnings risk off the table.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.