Will Verizon Stock Recover To Its Pre-Inflation Shock Highs?

Verizon stock (NYSE:VZ) currently trades at $34 per share, 43% below the levels seen on May 10, 2021 (pre-inflation shock high). Verizon saw its stock trading at around $51 at the end of June 2022, just before the Fed started increasing rates, and has lost about 33% since. In comparison, the S&P 500 gained 18% during this period. Verizon is being impacted by slower growth in the wireless phone space following the easing of Covid-19, while competition has also been mounting with carriers doling out aggressive promotions to add customers. Separately, rising interest rates have also likely made dividend stocks, such as Verizon, a bit less attractive to investors, while also making highly leveraged companies a bit more risky.

Interestingly, Verizon stock has had a Sharpe Ratio of -0.3 since early 2017, well below the 0.6 for the S&P 500 Index over the same period. This also falls short of the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Now, returning to the pre-inflation shock level would mean that Verizon stock will have to gain 75% from here. However, we estimate Verizon’s valuation to be around $41 per share, about 22% ahead of the current market price. While we believe Verizon can expand its earnings, driven by more premium plans and the winding down of its expensive 5G build-out, the stock could see some headwinds due to economic uncertainties. Our detailed analysis of Verizon’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: An increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply chain.
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how Verizon stock 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

Verizon stock declined from a little over $42 in September 2007 to just $27 as of March 2009 (as the markets bottomed out), implying the stock lost nearly 37% of its pre-crisis value. It recovered from the 2008 crisis to levels of around $31 in early 2010, rising roughly 16% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Verizon Fundamentals Over Recent Years

Verizon’s revenues rose from around $132 billion in 2019 to about $137 billion in 2022 led by higher demand for wireless data services following Covid-19 and the expansion of the company’s 5G network.  Verizon’s earnings also rose from around $4.66 per share in 2019 to $5.06 in 2022 driven by higher sales.

Does Verizon Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Verizon’s total debt increased from $111 billion in 2019 to about $153 billion presently, while its total cash stood at under $5 billion as of the most recent quarter. It also garners about $38 billion in cash flows from operations. Although the company’s cash holdings are relatively low, its stable cash flows put it in a reasonably healthy condition financially.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Verizon stock has the potential for reasonably strong gains once fears of a potential recession are allayed. That said, fears of a potential recession and concerns about competition could weigh on the company’s returns in the near term.

[1] Month-to-date and year-to-date as of 9/12/2023
[2] Cumulative total returns since the end of 2016

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