Is Verizon Stock Undervalued?

Verizon stock (NYSE: VZ) which currently trades at less than $52 per share, is still 16% below the levels seen at the beginning of 2020 and 11% below February 2020 level, just before the coronavirus pandemic. VZ stock has gained less than 3% from its March 2020 lows of $50 compared to a 110% 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 were. 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. Wireless service revenue is expected to grow another 3% in 2021 led by higher-priced unlimited plans. The company plans to add homes and businesses at a faster rate to its 5G network in the coming quarters. Verizon expects to provide 5G service to 15 million homes in the U.S. by the end of 2021. Thus, expectations of faster 5G expansion and growth in the 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 15% 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 a very significant upside in the company’s stock in the near term. Our conclusion is based on the comparative analysis of 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 110% from the lows seen on Mar 23, 2020, with the Fed’s multi-billion dollar stimulus package keeping the economy afloat during the prolonged lockdown and the vaccination drive allowing things to gradually return to near-normal conditions despite several waves of Covid infections.

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. 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-September 2020: Recovery of demand, with the phased lifting of lockdowns – no panic anymore with number of cases appearing to have plateaued
• October 2020-February 2021: Unprecedented surge in Covid cases forcing a fresh round of lockdowns across the nation
• Since March 2021: Ongoing vaccination drive and gradual re-openings drive an improvement in demand – buoying market sentiment

Given the steady decline in the number of new Covid-19 cases in the U.S., we expect an improvement in demand 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. According to Trefis, Verizon valuation works out to $61 per share.

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

[1] Month-to-date and year-to-date as of 11/25/2021
[2] Cumulative total returns since 2017

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