2023-10-10 16:45:19 ET
Summary
- Verizon stock has continued to underperform its peers despite its solid profitability and management's upbeat commentary.
- Management has increased the dividend and expressed confidence in the company's outlook. However, VZ fell to another low this week.
- The competitive environment is expected to intensify as growth slows, and Verizon's weak growth metrics are a concern. The critical question is whether these headwinds are priced in.
- I discuss why I'm still willing to give VZ one more chance for buyers to prove we are at peak pessimism. Hang on tight.
My bullish thesis on Verizon Communications Inc. ( VZ ) stock hasn't panned out since I upgraded it in April. I had anticipated more robust buying sentiments to sustain its recovery. However, sellers quickly returned to overwhelm VZ's dip buyers, intensifying the selling pressure.
Given the recent turn of events as the 10Y Treasury yield surged to nearly 4.9% last week, I believe it's timely for me to update VZ holders.
Management provided helpful commentary in two conferences in September (see here and here ). The company lifted its dividend per share by about 2%, corroborating Verizon's confidence in its full-year free cash flow or FCF outlook of about $17B and $17.5B. Revised analysts' estimates of $17.4B indicate optimism about the company's ability to meet the higher end of its guidance range. Therefore, the lack of sustained investor optimism as VZ fell to its October lows this week has likely surprised holders.
Notably, management updated that the growth normalization phase following the pandemic boost is ongoing. As such, post-paid net adds could fall between 5M and 6M for the industry moving ahead, down from 9M a year previously. In other words, the competitive environment is expected to intensify as growth slows.
Furthermore, robust performance in net adds from cable companies such as Charter ( CHTR ) and Comcast ( CMCSA ) has seen them posting market outperformance. As a result, CHTR and CMCSA have outperformed the telco leaders such as VZ, AT&T ( T ) stock and T-Mobile ( TMUS ) stock. Worse still, VZ has underperformed T and TMUS over the past year on a total return basis, as investors likely rotated out.
Therefore, I assessed that while management remains confident in its approach and kept its guidance, the market isn't so sure about its execution risks in the second half of 2023.
Seeking Alpha Quant assigned a "B" valuation grade to VZ, in line with T, suggesting VZ's valuation isn't aggressive. Despite that, its "D-" growth grade could lead to questions about whether the valuation is appropriate, given its weak growth metrics, which is much worse than T-Mobile's best-in-class "A" growth grade.
VZ's adjusted EBITDA leverage ratio is also a significant concern, estimated at 3.1x for FY23, higher than AT&T's 2.98x. They are also markedly higher than T-Mobile's 2.53x, which could add more pressure as interest rates are expected to stay higher for longer. As such, it could worsen the risks of Verizon's deleveraging efforts while attempting to bolster growth in an increasingly challenging competitive landscape.
Therefore, I believe it's justified for the market to inflict more pain on VZ holders over the past six months. The question is whether VZ's October lows could mark the turning point for the embattled telco leader?
Let me be clear here. VZ has a series of lower highs and lower lows on its weekly chart, which is no good. My previous thesis was predicated on mean-reversion opportunities, but they didn't sustain.
Sellers returned at every viable opportunity since VZ's early January highs to inflict more pain on VZ diamond hands, leading to the series of lower highs seen above.
In other words, if you still decide to bet on the long side of VZ at the current levels, you are going against the dominant downtrend. However, you have conviction that the trend could be near its peak pessimistic levels; it could lead to a reversal of its downtrend bias, or what we call the inflection point.
Could VZ's October lows be that point? My analysis suggests a validated bear trap (false downside breakdown) is in play. However, with VZ taking out lower lows since June 2023, I'm giving VZ another chance to prove that the mean-reversion thesis could work. If I'm taking this setup, I will consider an exit strategy placed below VZ's September highs ($35 level) to take (full or partial) profits and manage risk exposure accordingly. A risk management stop-loss placement should also be considered, if the thesis doesn't work out.
Rating: Maintain Strong Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
We Want To Hear From You
Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!
For further details see:
Verizon: The Hammering Continues - But I'm Giving VZ One More Chance