Verizon Stock Is Going Nowhere Fast, at Least for Now

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Verizon stock - Verizon Stock Is Going Nowhere Fast, at Least for Now

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Telecom giant Verizon (NYSE:VZ) didn’t start off September on the right foot. Two big research firms on Wall Street, Barclays and MoffettNathanson, downgraded Verizon stock on Tuesday, Sept. 4.

Barclays downgraded Verizon to Equal Weight, and slapped a $50 price target on the stock. Meanwhile, MoffettNathanson downgraded Verizon to Neutral, and slapped a $56 price target on the stock.

Neither of those analyst updates are all that exciting. Verizon currently trades around $53. Thus, neither of these firms see Verizon stock really going anywhere over the next twelve months (either up or down ~5%).

That feels about right. At current levels, Verizon stock isn’t cheap. But, it shouldn’t be cheap because the forthcoming launch of 5G promises healthier operating fundamentals for the company’s core wireless business.

Meanwhile, the stock also isn’t all that expensive, nor should it be. Despite healthy go-forward fundamentals, this still isn’t a big growth company.

Thus, I think the recent Wall Street updates on Verizon hit the nail on the head. This is a stock that will be stuck in neutral for the next several months as 5G tailwinds battle what has become a rather full valuation.

Growth Prospects Are Good, But Not Great

The bull thesis on Verizon stock is fairly straightforward.

5G is coming. That’s a good thing for Verizon. Over the past several years, the coverage playing field in the wireless service industry has been largely level. This level playing field has commoditized the whole industry.

The big differentiating factor between wireless service providers has simply been price. Thus, the wireless service industry has turned into a price war with competitors running promotions against one another in order to attract more customers. The net result for the industry’s leader, Verizon, has been lower margins.

But, 5G will change that; it will allow Verizon to once again distinguish itself from peers on a coverage performance basis. In other words, the coverage playing field won’t be level across the whole industry anymore. The rise of 5G changes the game and will put Verizon on its own playing field above the competition.

As a result, Verizon won’t be forced into price wars with competitors and will instead retake pricing power. That will provide a material boost to both revenues and margins, and Verizon’s numbers over the next 1-2 years should look a lot better than they have over the past 1-2 years.

Having said all that, 5G won’t be a long-term game-changer for Verizon. It isn’t like Verizon is the only wireless provider making the jump. All wireless providers are making the jump. The bet is just that the country’s top dog in terms of coverage will have a more robust 5G offering on the onset. Eventually, competitors will catch up.

Also, it isn’t like 5G will all the sudden bring in a swath of new customers. Maybe Verizon wins over some customers from other providers. But, new sub growth will likely be muted by overall market saturation.

In the big picture, then, Verizon has good, but not great, go-forward operating fundamentals. Considering the current valuation on Verizon is rather rich, I’m not so sure that this one is a big winner over the next several quarters.

Valuation Is Good, But Not Great

When it comes to Verizon, perhaps the most important valuation metric is dividend yield, because so many investors buy this stock for the yield.

The current dividend yield is 4.4%. That is a big yield. But, over the past 5 years, Verizon stock has consistently struggled when the dividend yield is at or below 4.4%. Thus, until the dividend gets hiked, history says that Verizon will struggle here and now.

On the flip side, Verizon is trading at just 11X forward earnings. That is markedly below the five-year average forward earnings multiple of 12.5X. Thus, while the dividend yield is below historically attractive levels, the forward earnings multiple is also below historical levels.

In the big picture, Verizon isn’t overvalued. But, it isn’t undervalued either. This is a stock which is fairly valued ahead of what will be a huge catalyst in 5G roll-out. Consequently, I’m a buyer of dips into the catalyst, but not a buyer here and now.

Bottom Line on Verizon Stock

Wall Street is right on this name. Verizon stock isn’t a buy or a sell. A neutral rating feels perfect for this stock.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/09/verison-stock-nowhere-fast/.

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