Thematic evaluation
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Verizon Communications, Inc. (VZ)

October 17, 2024

Compared to: Deutsche Telekom AG (DTE) | AT&T, Inc. (T) | The Communication Services Select Sector SPDR Fund (XLC)

Our reasoning

Verizon appears undervalued based on its below-average valuation multiples (P/E, EV/EBITDA) compared to industry peers, despite its strong market position and potential growth opportunities in 5G and fixed wireless access. The company's solid financial performance, including improving free cash flow and EBITDA growth, is not fully reflected in its current valuation, suggesting a disconnect between fundamentals and market perception.

Key takeaways
  • Verizon's revenue growth is declining, and its profitability is under pressure due to higher costs.
  • The company's asset utilization efficiency is declining, and its free cash flow is decreasing, which is a concern for its long-term financial health.
  • Verizon is focused on enhancing its network capabilities, retaining and growing its customer base, and improving overall financial and operational performance.
  • Key risks include competitive threats, execution challenges with 5G deployment, macroeconomic headwinds, cybersecurity threats, regulatory changes, and legal/compliance issues related to legacy network assets.
  • Verizon's valuation is currently below its historical and peer valuations, suggesting that the market is currently valuing Verizon at a discount.
  • Verizon's stock price has underperformed its benchmark and peers over the past three years, but it has a lower risk profile.
  • Verizon's management team is confident in its ability to deliver on its full-year 2024 financial guidance, but analyst estimates for the company's future performance are mixed.
  • Overall, Verizon is a large, established company with a strong brand and a solid financial position. However, the company faces significant challenges in a rapidly evolving industry, including intense competition, rising costs, and regulatory uncertainty.
Undervalued
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Evaluation summary

  1. Company Overview:

    • Verizon Communications, Inc. (VZ) is a leading global provider of communications, technology, information, and entertainment products and services. The company operates two main business segments: Verizon Consumer Group (Consumer) and Verizon Business Group (Business). The Consumer segment provides consumer-focused wireless and wireline communications services and products, including wireless, internet, video, and voice services. The Business segment offers wireless and wireline communications services and products, including data, video, conferencing, networking, security, and IoT services, to businesses and government customers. Verizon's key products and services include wireless services and equipment, fixed broadband internet, video, and voice services. The company's target market includes retail consumers, businesses, government entities, and wholesale partners/resellers. Verizon competes with other national wireless providers, cable companies, internet service providers, and technology companies.
    • We are using The Communication Services Select Sector SPDR Fund (XLC) as a benchmark for VZ's price performance and AT&T, Inc. (T) and Deutsche Telekom AG (DTE) as industry peers for comparative analysis.

  2. Financial Performance:

    • Verizon's revenue growth has been declining in recent quarters, with a 0.6% increase in the second quarter of 2024. This decline is primarily attributed to lower wireless equipment sales, offset by growth in wireless service revenues. The company's profitability has also been under pressure due to higher costs, including credit losses, insurance claims, severance, and asset rationalization.
    • Verizon's profitability metrics, such as operating income and net income, have been declining in recent quarters. The company's gross, operating, and net profit margins have improved due to lower upgrade activity and ongoing cost efficiency programs.
    • Verizon's return on average assets (ROA), return on average total equity (ROE), and return on average invested capital (ROIC) have been declining in recent quarters, indicating a decline in asset utilization efficiency.
    • Compared to its peers, Verizon has underperformed both AT&T (T) and Deutsche Telekom (DTE) in terms of revenue growth, profitability, and return on assets.

  3. Operational Efficiency:

    • Verizon's working capital management efficiency has been declining, as evidenced by the increasing trend in changes in working capital. This suggests that the company is having difficulty managing its receivables, inventory, and payables, which could be a sign of operational inefficiencies or a competitive disadvantage.
    • Verizon's cash flows from core business operations have been decreasing in recent quarters, suggesting challenges in generating cash from its core business. Cash flows related to the acquisition and disposal of long-term assets have also been decreasing, indicating a more conservative investment strategy or a lack of attractive investment opportunities.
    • Verizon's free cash flow has been decreasing in recent quarters, which is a concern for the company's long-term financial health. This suggests that the company is not generating enough cash to cover its investments and debt obligations.
    • Verizon's capital expenditure has been declining in recent quarters, which could be a sign of a more conservative investment strategy or a lack of attractive investment opportunities.
    • Verizon's dividend and share repurchase sustainability analysis indicates that the company is reducing its reliance on debt financing and is returning less capital to shareholders.
    • Compared to its peers, Verizon has a lower free cash flow margin and a lower cash flow to total debt ratio, indicating a lower level of operational efficiency.
    • Verizon's short-term liquidity position is weakening, as evidenced by the decreasing trend in operating cash flow. This suggests that the company is having difficulty generating enough cash to cover its short-term obligations, which could be a concern if the company faces unexpected financial challenges.
    • Verizon's long-term solvency is also under pressure, as indicated by the increasing trend in long-term debt and the decreasing trend in equity. This suggests that the company is relying more heavily on debt financing, which could increase its risk of default if its profitability deteriorates.

  4. Growth Opportunities:

    • Verizon is focused on enhancing and monetizing high-performing networks, retaining/growing its customer base, and improving financial/operating performance. The company is investing significantly in wireless spectrum, network infrastructure, and fiber to support growth initiatives.
    • Verizon has completed the acquisition of TracFone Wireless to expand prepaid and value mobile services. The company is also exploring opportunities in the AI economy, leveraging its network's mobile edge computing capabilities and fiber footprint.
    • Verizon's strategic priorities center on enhancing its network capabilities, retaining and growing its high-quality customer base, and improving overall financial and operational performance.
    • Verizon's management team expressed excitement about the company's future, highlighting the opportunities in mobility, broadband, and cloud services as essential services with increasing value.

  5. Risks and Threats:

    • Verizon faces intense competition in a rapidly evolving industry, requiring significant capital investments to maintain its technology leadership and network advantage.
    • The company's profitability has been impacted by higher costs, including credit losses, insurance claims, and restructuring charges, which have offset revenue growth.
    • Key risks include competitive threats, execution challenges with 5G deployment, macroeconomic headwinds, cybersecurity threats, regulatory changes, and legal/compliance issues related to legacy network assets.
    • Verizon's financial position remains strong, with robust cash flow generation, though higher interest expense and pension obligations have impacted operating cash flows.

  6. Valuation Analysis:

    • Verizon's valuation metrics, such as P/E, EV/EBITDA, and price-to-book, are currently below their historical averages and below those of its peers. This suggests that the market is currently valuing Verizon at a discount to its historical and peer valuations.
    • Potential catalysts for Verizon's valuation include continued growth in wireless service revenue, improved profitability, and successful execution of its strategic initiatives.

  7. Price Performance:

    • Verizon's stock price has underperformed both its benchmark, The Communication Services Select Sector SPDR Fund (XLC), and its peers, AT&T (T) and Deutsche Telekom (DTE), over the past three years.
    • Verizon's stock price has been less volatile than its benchmark and peers, indicating a lower risk profile. However, Verizon has experienced more frequent and longer drawdowns than its peers, suggesting a higher risk profile despite its lower volatility.

  8. Future Outlook:

    • Verizon's management team has reiterated its full-year 2024 financial guidance, expressing confidence in its ability to deliver on the targets. The company expects sequential growth in wireless service revenue in the second half of the year, driven by pricing actions, volume improvements, and fixed wireless access growth.
    • Analyst estimates for Verizon's future performance are mixed, with some analysts expecting continued growth in wireless service revenue and improved profitability, while others are more cautious due to the company's declining revenue growth and profitability.

  9. Summary:

    • Verizon is a leading provider of wireless, broadband, and enterprise communications services, with a focus on building high-quality networks and delivering innovative solutions to consumers and businesses.
    • The company faces intense competition in a rapidly evolving industry, requiring significant capital investments to maintain its technology leadership and network advantage.
    • Verizon has experienced some profitability pressures from higher costs, including credit losses, insurance claims, and restructuring charges, which have offset revenue growth.
    • The company's financial position remains strong, with robust cash flow generation, though higher interest expense and pension obligations have impacted operating cash flows.
    • Key risks include competitive threats, execution challenges with 5G deployment, macroeconomic headwinds, cybersecurity threats, regulatory changes, and legal/compliance issues related to legacy network assets.
    • Verizon's strategic priorities center on enhancing its network capabilities, retaining and growing its high-quality customer base, and improving overall financial and operational performance.
    • Verizon's valuation is currently below its historical and peer valuations, suggesting that the market is currently valuing Verizon at a discount.
    • Verizon's stock price has underperformed its benchmark and peers over the past three years, but it has a lower risk profile.
    • Verizon's management team is confident in its ability to deliver on its full-year 2024 financial guidance, but analyst estimates for the company's future performance are mixed.
    • Overall, Verizon is a large, established company with a strong brand and a solid financial position. However, the company faces significant challenges in a rapidly evolving industry, including intense competition, rising costs, and regulatory uncertainty. Investors should carefully consider these factors before making an investment decision.
Peer fundamentals 
Fundamentals
Insights
  • Verizon's revenue growth is declining, which is a concern for the company's long-term financial health.
  • Verizon's profitability is declining, as evidenced by the decreasing trend in operating income and net income.
  • Verizon's liquidity position is weakening, as evidenced by the decreasing trend in cash and short-term investments and the increasing trend in short-term debt.
  • Verizon's long-term solvency is also under pressure, as indicated by the increasing trend in long-term debt and the decreasing trend in equity.
  • Verizon's asset utilization efficiency is declining, as evidenced by the decreasing trend in return on average assets and return on average invested capital.
  • Verizon's free cash flow is decreasing, which is a concern for the company's long-term financial health.
  • Verizon's overall financial health is weakening, as evidenced by the declining trends in profitability, liquidity, and solvency.
Analysis
  • Revenue - Verizon's revenue growth is declining, which is a concern for the company's long-term financial health. This suggests that the company is facing challenges in generating revenue, which could be due to factors such as declining customer demand, increased competition, or a shift in consumer preferences. - The company's revenue growth is likely being impacted by the intense competition in the telecommunications industry and the shift in consumer preferences towards wireless and internet-based services. - Verizon's revenue growth is likely to remain under pressure in the near future, as the company continues to face intense competition and the shift in consumer preferences towards wireless and internet-based services.
    • Profitability
      • Verizon's profitability is declining, as evidenced by the decreasing trend in operating income and net income. This suggests that the company is facing challenges in generating profit, which could be due to factors such as lower revenue growth, higher operating expenses, or a combination of both.
      • Verizon's ability to control operating expenses is declining, which is a concern for the company's profitability.
      • Verizon's profitability is likely to remain under pressure in the near future, as the company continues to face pressure to increase its spending on network infrastructure and new technologies.
    • Liquidity
      • Verizon's liquidity position is weakening, as evidenced by the decreasing trend in cash and short-term investments and the increasing trend in short-term debt. This could be a concern if the company faces unexpected financial challenges.
      • Verizon's short-term liquidity position is weakening, as evidenced by the decreasing trend in operating cash flow. This suggests that the company is having difficulty generating enough cash to cover its short-term obligations, which could be a concern if the company faces unexpected financial challenges.
    • Solvency
      • Verizon's long-term solvency is also under pressure, as indicated by the increasing trend in long-term debt and the decreasing trend in equity. This suggests that the company is relying more heavily on debt financing, which could increase its risk of default if its profitability deteriorates.
      • Verizon's long-term solvency is also under pressure, as evidenced by the decreasing trend in free cash flow and the increasing trend in debt. This suggests that the company is not generating enough cash to cover its investments and debt obligations, which could increase its risk of default if its profitability deteriorates.
    • Operational Efficiency
      • Verizon's asset utilization efficiency is declining, as evidenced by the decreasing trend in return on average assets and return on average invested capital. This suggests that the company is not generating as much profit from its assets as it used to, which could be a sign of operational inefficiencies or a competitive disadvantage.
      • Verizon's working capital management efficiency is declining, as evidenced by the increasing trend in changes in working capital. This suggests that the company is having difficulty managing its receivables, inventory, and payables, which could be a sign of operational inefficiencies or a competitive disadvantage.
      • Verizon's CapEx efficiency is declining, as evidenced by the decreasing trend in capital expenditures and the declining trend in revenue growth. This suggests that the company is not generating as much revenue from its investments as it used to, which could be a sign of operational inefficiencies or a competitive disadvantage.
    • Cash Flow Analysis
      • Cash flows from core business operations are decreasing. This suggests that Verizon is facing challenges in generating cash from its core business, which could be due to factors such as declining profitability, increased competition, or changes in customer behavior.
      • Cash flows related to the acquisition and disposal of long-term assets are decreasing. This suggests that Verizon is reducing its investments in long-term assets, which could be a sign of a more conservative investment strategy or a lack of attractive investment opportunities.
      • Cash flows related to borrowing and repaying debt, issuing and repurchasing equity, and paying dividends are decreasing. This suggests that Verizon is reducing its reliance on debt financing and is returning less capital to shareholders, which could be a sign of a more cautious financial strategy or a lack of confidence in future growth prospects.
      • Verizon's free cash flow is decreasing, which is a concern for the company's long-term financial health. This suggests that the company is not generating enough cash to cover its investments and debt obligations.
    • Risk Factors
      • Verizon's declining profitability, its more conservative investment strategy, and its reduced reliance on debt financing are all potential risk factors that could impact the company's future financial performance.
      • The company's free cash flow is likely to remain under pressure in the near future, which could limit its ability to repay debt, increase dividends, or invest in organic growth opportunities.
      • Verizon's liquidity position is weakening, which could make it difficult for the company to meet its short-term obligations if it faces unexpected financial challenges.
      • Verizon's long-term solvency is also under pressure, which could increase its risk of default if its profitability deteriorates.
    • Future Outlook
      • Verizon's future financial performance is likely to be impacted by the company's declining profitability, its more conservative investment strategy, and its reduced reliance on debt financing.
      • The company's free cash flow is likely to remain under pressure in the near future, which could limit its ability to repay debt, increase dividends, or invest in organic growth opportunities.
      • Verizon's revenue growth is likely to remain under pressure in the near future, as the company continues to face intense competition and the shift in consumer preferences towards wireless and internet-based services.
      • Verizon's profitability is likely to remain under pressure in the near future, as the company continues to face pressure to increase its spending on network infrastructure and new technologies.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-16)
The Communication Services Select Sector SPDR Fund (XLC)
  • Performance Comparison:
    • VZ's historical performance has been mixed compared to XLC. While VZ outperformed XLC in the 1-year period, it underperformed in all other periods, including the 2-year and 3-year periods. This suggests that VZ's performance has been inconsistent relative to the benchmark.
  • Risk and Return Analysis:
    • VZ's annualized returns have been lower than XLC's in the 2-year and 3-year periods, indicating that VZ has not been able to generate as much return as the benchmark.
    • VZ's annualized volatility has been consistently lower than XLC's, suggesting that VZ is less volatile than the benchmark. This could be attributed to VZ's more stable business model and its focus on providing essential communication services.
    • VZ's maximum drawdown of 41.21% was slightly lower than XLC's maximum drawdown of 46.65%. This indicates that VZ has been more resilient to market downturns than XLC, suggesting a lower risk profile.
  • Risk-Adjusted Performance:
    • XLC consistently showed a higher Sharpe ratio than VZ, indicating that XLC offered better risk-adjusted returns over the period. This suggests that XLC has been able to generate higher returns for a given level of risk.
    • VZ's beta values were consistently below 1, indicating that VZ was less volatile than the market. This suggests that VZ is less sensitive to market movements than XLC, which has a beta around 1.
  • Overall Assessment:
    • VZ's performance has been inconsistent relative to XLC, with periods of outperformance and underperformance. While VZ has a lower risk profile, as evidenced by its lower volatility and drawdown, it has not been able to generate as much return as XLC. This suggests that investors seeking higher returns may prefer XLC, while those seeking lower risk may prefer VZ.
    • The recent trends suggest that both VZ and XLC have experienced a decrease in volatility and drawdown magnitude, with VZ remaining consistently less volatile than XLC. However, XLC continues to offer a higher risk-adjusted return, as indicated by its consistently higher Sharpe ratio.
Peers Price History(as of 2024-10-16)
Deutsche Telekom AG (DTE)AT&T, Inc. (T)
  • Performance Comparison:
    • Verizon (VZ) has generally underperformed both AT&T (T) and Deutsche Telekom (DTE) over the past three years, with the exception of a few periods where it outperformed DTE. This underperformance is particularly evident in the longer timeframes, such as the 3-year period, where VZ has underperformed T by 35.56% and DTE by 75.82%.
    • VZ's performance has been less consistent compared to its peers, with more frequent periods of underperformance. This suggests that VZ may be facing challenges in its core business or may be struggling to keep up with the growth of its competitors.
  • Risk and Return Analysis:
    • VZ has provided lower annualized returns than both T and DTE over the past three years. For example, in the 3-year period, VZ's annualized return was 0.71%, while T's annualized return was 11.26% and DTE's annualized return was 21.19%.
    • VZ has generally exhibited lower annualized volatility than T and DTE, indicating that it has been less volatile than its peers. However, VZ has experienced more frequent and longer drawdowns than its peers, suggesting a higher risk profile despite its lower volatility.
    • VZ's maximum drawdown of 41.21% on 10/13/2023 is significantly higher than T's maximum drawdown of 36.46% on 07/18/2023 and DTE's maximum drawdown of 41.07% on 03/16/2022. This indicates that VZ's risk profile is higher than that of its peers, as it has the potential to experience larger losses during market downturns.
  • Risk-Adjusted Performance:
    • VZ's Sharpe Ratio has generally been lower than that of T and DTE, indicating that VZ has offered a lower risk-adjusted return. This suggests that VZ's returns have not been sufficient to compensate for its higher risk profile.
    • VZ's beta value has generally been below 1, indicating that it is less volatile than the overall market. However, VZ's beta has been slightly higher than that of DTE, suggesting that VZ is slightly more sensitive to market movements than DTE.
  • Overall Assessment:
    • VZ has underperformed its peers in terms of both absolute and risk-adjusted returns over the past three years. While VZ has exhibited lower volatility than its peers, it has experienced more frequent and longer drawdowns, indicating a higher risk profile.
    • VZ's lower risk-adjusted performance and higher risk profile may be attributed to factors such as its slower growth rate, its exposure to a more mature market, and its more conservative approach to growth.
    • Investors considering VZ should carefully evaluate its risk profile and its ability to generate returns that compensate for its higher risk.
Peers Fundamentals(as of 2024-06-30)
Deutsche Telekom AG (DTE)AT&T, Inc. (T)

  1. Market Position and Size:

    • VZ is the largest company in the peer group, with a market cap significantly larger than its competitors.
    • This size advantage gives VZ a strong market position and allows it to leverage its scale to achieve higher revenue, EBITDA, and net income compared to its peers.

  2. Profitability and Efficiency:

    • VZ's profitability is strong compared to its peers, despite its size.
    • Its EBITDA Margin is significantly higher than the industry average, indicating that VZ is able to generate significant profits from its operations.
    • However, its Net Profit Margin is lower than the industry average, suggesting that VZ could still improve its profitability by further reducing expenses and improving its operating efficiency.
    • VZ's efficiency in generating returns is mixed. While its ROE and ROTC are higher than its peers and the industry average, its ROA and ROIC are lower.
    • This suggests that VZ is more efficient in generating returns from its equity and capital, but less efficient in generating returns from its assets and invested capital.

  3. Financial Health and Stability:

    • VZ's liquidity and debt position are mixed.
    • While its Current Ratio and Quick Ratio are lower than the industry average, its Total Debt to Total Equity Ratio and Debt / EBITDA are also lower than the industry average.
    • This suggests that VZ has a lower ability to meet its short-term obligations compared to the industry, but its debt levels are also lower than the industry average.

  4. Valuation and Market Perception:

    • VZ's valuation is significantly lower than its peers and the industry average.
    • This suggests that the market is undervaluing VZ compared to its competitors and the broader industry.

  5. Cash Flow and Capital Management:

    • VZ's cash flow generation is strong compared to its peers, despite its size.
    • Its Net Operating Cash Flow and Free Cash Flow are higher than its peers, indicating that VZ is able to generate significant cash from its operations.
    • However, its Total Capital Expenditure is lower than its peers, suggesting that VZ is more efficient in managing its capital expenditures.

  6. Growth and Future Prospect:

    • VZ's growth rates are mixed compared to its peers.
    • VZ has consistently higher growth in Net Income, Basic Earnings per Share, Free Cash Flow, and Free Cash Flow Margin compared to the peer group average.
    • However, VZ has consistently lower growth in Sales/Revenue, EBITDA, Total Assets, Book Value Per Share, and EBIT Margin compared to the peer group average.
    • VZ's growth rates have been volatile, with significant year-to-year fluctuations.
    • VZ's 3-year CAGR is lower than its 5-year CAGR for most metrics, indicating a deceleration in growth.
    • VZ's growth is concentrated in specific areas, such as Net Income, Basic Earnings per Share, Free Cash Flow, and Free Cash Flow Margin.
    • VZ's growth profile is mixed. While it shows strong growth in profitability and cash flow, its revenue growth is lagging behind its peers.

  7. Potential for Investment:

    • VZ is a large and profitable company with a strong cash flow generation.
    • However, its growth rates are lagging behind its peers, and its efficiency in generating returns from its assets and invested capital is lower than the industry average.
    • Additionally, VZ has a higher level of long-term debt compared to its peers, which could be a concern for investors.
    • Despite these weaknesses, VZ's valuation is significantly lower than its peers and the industry average, suggesting that the market is undervaluing VZ's earnings potential.
    • Investors may consider VZ as a potential investment if they are looking for a large and profitable company with a strong cash flow generation, but they should be aware of the risks associated with its lower growth rates and higher debt levels.

  8. Key Risks and Considerations:

    • VZ's lower growth rates compared to its peers could indicate a loss of market share or difficulty in keeping up with industry trends.
    • VZ's lower efficiency in generating returns from its assets and invested capital could indicate operational inefficiencies or a need to improve its asset allocation strategies.
    • VZ's higher level of long-term debt compared to its peers could increase its financial risk and make it more vulnerable to economic downturns.

  9. Overall Assessment:

    • VZ is a financially strong company with a dominant market position.
    • However, its growth rates are lagging behind its peers, and its efficiency in generating returns from its assets and invested capital is lower than the industry average.
    • Additionally, VZ has a higher level of long-term debt compared to its peers, which could be a concern for investors.
    • Despite these weaknesses, VZ's valuation is significantly lower than its peers and the industry average, suggesting that the market is undervaluing VZ's earnings potential.
    • Investors should carefully consider VZ's growth prospects, efficiency, and debt levels before making an investment decision.