October 25, 2021

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Is Verizon Stock Undervalued At $55?

Verizon stock (NYSE: VZ), which currently trades at $55 per share, is still 11% below the levels seen at the beginning of 2020 and 6% below February 2020 levels, just before the pandemic. VZ stock has gained 9% from its March 2020 lows of $50 compared to more than a 100% jump in the S&P 500 from its lows. The stock has underperformed the market because the fall in the stock in the first place during the pandemic was much lower than that of the overall market, as its business was not as affected as most other industries. This was reflected in the 2.2% growth in its wireless service revenue in 2020 (pandemic year), which is the largest revenue segment for Verizon

VZ
. It is projected that wireless service revenue could grow another 3% in 2021 led by higher-priced unlimited plans. The company’s plan to add homes and businesses at a faster rate to its 5G network in the coming quarters is likely to drive healthy growth in the wireless service business. Verizon expects to provide 5G service to 15 million homes in the U.S. by the end of 2021. Thus, anticipation of faster 5G expansion and growth in wireless business has led to a rise in the stock in the last few months. Continued growth will likely see the stock rising a little more than 10% in the near term. Having said that, Verizon still lags its close competitors in adding new postpaid phone customers (most valuable for a telecom company). Thus, we do not think there will be any dramatic upside in the company’s stock in the near term. Our conclusion is based on the comparative analysis on the performance of Verizon stock during the 2008 recession vs now in our dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 102% from the lows seen on Mar 23, 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how Verizon and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Verizon and S&P 500 Performance During 2007-08 Crisis

VZ stock declined from levels of close to $42 in September 2007 (pre-crisis peak) to levels of little less than $27 in March 2009 (as the markets bottomed out), implying VZ stock lost 37% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of around $31 in early 2010, rising by 16% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

Verizon Fundamentals Over Recent Years

Verizon revenues grew 9% from $118 billion in 2017 to $128.3 billion in 2020, primarily led by subscriber additions. Despite modest growth in revenues, the EPS fell from $7.37 in 2017 to $4.30 in 2020, but this was mainly because the EPS was unusually high in 2017 due to a tax benefit impact. EPS, in fact, saw an improvement from $3.76 in 2018 to $4.30 in 2020.

Does VZ Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

VZ’s total debt increased from $3.5 billion in 2017 to $5.9 billion at the end of 2020, while its total cash increased from $2 billion to $22 billion over the same period. At the same time, the company’s cash from operations have also increased from $24 billion to $42 billion during this time. Though debt has increased, the company’s increased CFO generation and a strong cash balance are likely to help VZ weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect an improvement in demand (with lockdowns being lifted and vaccination coverage widening) to buoy market expectations. As investors focus their attention on expected 2021 and 2022 results, we believe Verizon stock has the potential for modest gains once fears surrounding the Covid outbreak are put to rest. But major upside in the stock is not likely as Verizon still lags its peers (T-Mobile U.S. and AT&T

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) in terms of customer additions.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market since 2016.

 

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