Streetwise for Sunday, June 2, 2019
Trying to forecast short-term trends on Wall Street is like trying to herd cats, a great idea but one with little probability of success. However, being patient will both alleviate market volatility and enable you to benefit from a continual compounding of earnings.
Similarly, a company that will likely require some degree of patience is Verizon (VZ). When I last wrote about the company a year ago, my 2018 earnings estimate for Verizon was $4.45 per share, with a projected 12-month share price of $54 for a gain of about 10 percent.
So how well did Verizon perform? Earnings for the year came in at $4.71, well above my estimate, while the shares recently traded at $58.61, also well above my forecast.
Verizon is the nation’s largest wireless provider with about 116 million subscribers served by a network that covers 98 percent of the nation’s population and over 500 markets.
For the first-quarter 2019, Verizon reported earnings per share (EPS) of $1.22, as compared to $1.11 in first-quarter 2018. On an adjusted basis (non-GAAP), first-quarter 2019 EPS was $1.20, excluding a special item, compared with adjusted EPS of $1.17 in first-quarter 2018.
Verizon’s first-quarter 2019 EPS included a 2-cent benefit due to a pension re-measurement triggered by the company’s Voluntary Separation Program.
There was also a reduction in benefits from the adoption of a revenue recognition standard and the adoption of a lease accounting standard. The combined impact was a 4-cent year-over-year charge to EPS.
Total consolidated operating revenues in first-quarter 2019 were $32.1 billion, up 1.1 percent from first-quarter 2018, primarily driven by strong wireless service revenue growth.
Cash flow from operations totaled $7.1 billion in first-quarter 2019, an increase of approximately $400 million year over year, while first-quarter capital expenditures totaled $4.3 billion.
In 2018, Verizon announced a goal to achieve $10 billion in cumulative cash savings by 2021. This initiative has yielded approximately $3.0 billion of cumulative cash savings since this program began.
Verizon is laser-focused on building out the promise of 5G, while also intent on paying down debt. The company made its dual focus very clear during its latest conference call.
CEO Hans Vestberg discussed the 5G potential, where as CFO Matt Ellis discussed Verizon’s plans for debt retirement. Ellis noted that in Q1 2018, the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) was 2.4 times earnings.
One year later, Verizon’s EBITDA is down to a 2.1 multiple, with a goal of 1.75 to 2. To put numbers to this metric, in the most recent quarter, the company’s net long-term debt was $111 billion, down about 4% from the same period last year.
The big difference between Verizon and AT&T is the breakdown of their revenue streams. While Verizon relies very heavily on Verizon Wireless, AT&T is far more diverse.
To fund its 5G program the company needs cash flow and the company is a cash flow machine with cash flow in the billions. In the most recent quarter, its core operating cash flow reached $9.4 billion. By point of comparison, AT&T generated about $11.6 billion in operating cash flow.
However, operating cash flow is not the same as free cash flow. The best way to compare free cash flow across companies is to look at free cash flow generated per $1 of revenue.
In the most recent quarter, AT&T’s free cash flow per $1 of revenue equaled $0.14, while Verizon’s was $0.16. Therefore, Verizon has relatively more to spend from each dollar of revenue.
Finally, dividend obligations favor Verizon. In the first quarter, AT&T’s payout ratio was just under 58%, whereas for Verizon it was under 49%. Although AT&T generated more free cash flow on an absolute basis, the actual money each company had after dividends was almost the same.
The intrinsic value of the shares, using a free cash flow to the firm model, is $92.10 versus a share price of $58.61. My 2018 earnings estimate for Verizon is $4.81 per share, with a projected 12-month share price of $64 for approximately a 10 percent gain.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to ww.RuddReport.com.