Streetwise for Sunday, June 3, 2018
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 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 earnings target for 2017 was $3.78 per share, with a projected 12-month share price of $51.
So how well did Verizon perform? Earnings for the year came in at $3.74, a bit light of my estimate, while the shares recently closed at $48.52, also a bit light of my forecast.
Founded in 1983 as Bell Atlantic, the company changed its name to Verizon in 2000 after merging with GTE corporation. This created the nation’s largest telecom company. Then in 2014 Verizon spent $130 billion to acquire Vodafone’s 45 percent stake in Verizon Wireless.
Today Verizon is America’s largest wireless provider with 116.3 million subscribers. These customers are served by a network that covers 98 percent of the nation’s population and serves over 500 markets. The wireless business accounts for 69 percent of Verizon’s total revenue.
The remaining 31 percent is derived from the wireline business which includes legacy voice, data and video communications, broadband video and internet, corporate networking solutions, security and managed network services.
Verizon’s market position is key to the company’s success. As of the end of the first quarter Verizon had just over 35 percent of all domestic wireless subscriptions.
Nonetheless, Verizon has struggled with the secular decline in legacy phones. Its broadband internet offerings, such as FIOS, failed to win market share in certain key markets.
Therefore, in April 2016 the company sold a large amount of its phone, internet, and video business located in California, Florida, and Texas to Frontier Communications for $10.5 billion. By December 2016, the company also sold 23 data centers located in the US and Latin America to Equinix for $3.6 billion.
Meanwhile, Verizon acquired XO Holding’s wireline business for $1.5 billion (fiber and IP, Ethernet network), NextLink (5G spectrum), and WideOpenWest.
In addition, Verizon has spent over $10 billion to acquire over 50 media properties, including the Huffington Post, Yahoo, AOL, MAKERS, Tumblr, Build Studies, Techcrunch, and Engadget. The company also spent $3.4 billion to acquire Telogis and Fleetmatics to try and capture some of the smart car market.
Adjusted earnings per share for the first quarter were up 23.1 percent. Unfortunately, that was primarily due to the positive effects of tax reform. Much of the revenue growth during the first quarter came from a 22 percent increase in handset sales, the future of which is difficult to project. As a result, management is guiding for low single-digit revenue growth in 2018.
Yet, it is hard to argue with success. Rootmetrics recently reported that, for the ninth consecutive semi-annual test of America’s wireless networks, Verizon was the industry leader.
Nonetheless, cost-cutting is necessary and management plans to reduce costs by $10 billion over the next four years through a combination of zero-based budgeting and a smaller workforce. Meanwhile, Verizon has access to the capital required to build out the next generation 5G network.
And, Verizon has managed to grow its quarterly dividend for 13 consecutive years, showing a current dividend yield of 5.09 percent and a 10-year average dividend growth rate of 3.51 percent.
Verizon’s economic profit, defined as the spread between the return on capital and the cost of capital multiplied by invested capital, increased during 2017, to $7.056 billion. However, it has declined significantly from 2015’s $13.688 billion.
The intrinsic value of the shares using a free cash flow to the firm model, is $93.82. My 2018 earnings estimate for Verizon is $4.45 per share, with a projected 12-month share price of $54 for about a 10 percent annual growth rate.
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 www.RuddReport.com.