Here’s Why Verizon’s Stock Could See Close To 10% Appreciation
At the current price of $57, Verizon stock (NYSE: VZ) looks undervalued despite having increased close to 15% since the March 25 lows of this year. VZ stock has increased from $50 to $57 off the recent bottom compared to the S&P 500 which saw 44% rise from its recent lows. The stock has outperformed the broader market over the last 4 months mainly because the drop in stock price was less than the market decline during the pandemic in the first place. Despite this outperformance and the stock currently being over 21% above its 2017 levels, we believe that Verizon still has an upside of close to 10% considering its tie-up with Disney and 5G expansion plans. Our dashboard What Factors Drove 20% Change In Verizon Stock Between 2017 And Now? has the underlying numbers.
The rise in stock price between 2017-2019 is justified by the 4.6% increase in Verizon’s revenues during this period, driven by higher wireless revenue on the back of increased post-paid revenues. However, net income margin declined from 24.2% in 2017 to 15% in 2019, thereby leading to earnings per share to drop from $7.37 to $4.66, which reflected a 37% drop in earnings. But the P/E multiple more than doubled from 6x in 2017 to 13x in 2019, as the stock price continued to rise despite the drop in earnings. This was mainly because lower margins were due to a higher base, as the company received one-time tax benefits in 2017 leading to unusually higher margins then. Thus the decline in profit was not due to a deterioration in fundamentals and the market acknowledged this with a rise in the stock price. In fact, after sharply dropping in 2018, margins and EPS went up in 2019. However, the P/E multiple dropped slightly in 2020 following the outbreak of Covid and currently stands at 12x. We believe the company’s P/E multiple has the potential to increase to its 2018 level of 14x in the near term.
What’s The Likely Trigger & Timing For Further Upside?
The global spread of coronavirus in early 2020 affected industrial and economic activity which, in turn, adversely affected consumer spending power, leading to some drop in demand for the company’s traditional data services. This was partially reflected in the Q1 2020 results where revenues declined 1.6% y-o-y. But the recently announced Q2 2020 numbers reflect a greater impact of the crisis where Verizon reported revenue of $30.45 billion, marking a decline of 5.1% y-o-y. This decline was primarily driven by lower wireless service revenue, primarily due to limited in-store engagement and the impact of Covid-19 on customer behavior. For Q2 2020, Verizon’s adjusted EPS came in at $1.18, compared with $1.23 in Q2 2019. The company has already withdrawn its full-year 2020 revenue guidance, whereas EPS growth has been revised downward to -2% to 2% from the earlier guidance of 2% to 4%.
However, over the coming weeks we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in most of the states in the US compared to the rate seen in April-May to boost market expectations. Additionally, the gradual lifting of lockdowns is also giving investors confidence that developed markets may have put the worst of the pandemic behind them. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.
As the global economy opens up and lock downs are lifted in phases, consumer spending is expected to pick up. Verizon is currently completely focused on expanding 5G technology which is expected to be the next big thing in the telecom space and could help Verizon reap rich benefits in the medium term. Additionally, the tie-up with Disney for offering Disney+ to its subscribers is also expected to drive a reduction in the subscriber churn rate. With investors’ focus shifting to 2021 numbers, and with Verizon’s revenues and margins projected to see healthy growth in 2021, this could help the stock to rise further from its current levels. Verizon’s valuation by Trefis gives us a fair price estimate of $62 per share for VZ’s stock, reflecting a potential upside of around 8% from the current market price of $57.
For deeper insight into the telecom war, see how Verizon compares with AT&T and also, why is Verizon falling behind T-Mobile?
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