Is Verizon Overvalued?

on March 28 2013 12:30 PM

With shares of Verizon Communications Inc. (NYSE:VZ) trading at around $48.99, is VZ an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Verizon is the proud owner of the nation’s largest 4G network. This allows customers to browse the Internet, download applications, send emails, and send picture/video messages at rapid speeds. Currently, Verizon is the only major wireless carrier to offer 100 percent 4G LTE. That’s impressive, but does that fact alone make the stock a quality investment? Negative!

Verizon is consistently growing market share, and if it can finally get its hands on the remaining 45 percent of Verizon Wireless from Vodafone Group Public Limited Company (NASDAQ:VOD), then the long-term prospects will be rather rosy. Verizon has a goal of making this happen by the end of this year. However, this remains to be seen. It would also come at a hefty cost. Many numbers have been thrown around, ranging from $100 billion to $115 billion. That’s a hefty price tag. For those hoping for this deal to go down, it would be wise to consider Vodafone over Verizon. In most (not all) buyout cases, the company being acquired sees a significant upward move in the stock price, not the acquiring company.

It looks as though Verizon is a story based more on future potential than impressive current results. Will numbers prove this suspicion? The chart below compares fundamentals for Verizon, AT&T (NYSE:T), and Sprint Nextel Corp. (NYSE:S). These three companies differ in size. Verizon has a market cap of $140.94 billion, AT&T has a market cap of $210.60 billion, and Sprint has a market cap of $18.12 billion.

Verizon Verizon  http://wallstcheatsheet.com

Investing in a company that’s trading at 160 times earnings is about as risky as going hang-gliding in Chicago while blindfolded. AT&T is the strongest company of the three when it comes to fundamentals. Let’s take a look at some more important numbers prior to forming an opinion on Verizon.
 

E = Equity to Debt Ratio Is Strong   

The debt-to-equity ratio for Verizon is stronger than the industry average of 0.80. It’s also the most impressive in this group.

Verizon Verizon  http://wallstcheatsheet.com

T = Technicals Are Strong

Verizon has outperformed AT&T and Sprint year-to-date. Sprint has been the big winner over the past year, but Sprint is clearly the weakest company of the three.

Verizon Verizon  http://wallstcheatsheet.com

At $48.99, Verizon is trading above all its averages.

Verizon Verizon  http://wallstcheatsheet.com

E = Earnings Have Been Shaky          

Revenue has been on a relatively steady march higher through the years, but earnings have been inconsistent and unimpressive. Getting a hold of the remaining 45 percent stake in Verizon Wireless might help solve this problem down the road, but would it be worth the enormous cost?

Verizon Verizon  http://wallstcheatsheet.com

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and a decline in earnings.

Verizon Verizon  http://wallstcheatsheet.com/

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Wireless is hot right now, and Verizon has many strategic partnerships that will allow it to remain one of the top players in the industry. The problem is that the industry might not remain as strong as it is today due to uncertainties in the global economy. There are many question market out there right now. For instance, is this a debt-fueled bubble? Will there be contagion in Europe due to the Cyprus situation? Everything might work out, but if one of these major threats comes to fruition, then the industry won’t hold up well. It didn’t hold up well during the financial crisis of 2008/2009. The silver lining is that Verizon held up better than its peers during that difficult time.

Conclusion

A deal for Verizon Wireless isn’t definite. Contrary to popular belief, that might be a blessing in disguise. At the moment, Verizon has excellent cash flow, and it offers a nice yield. On the other hand, margins aren’t impressive, and with the stock trading at such a high multiple, a lot of expectations will need to be met in order for the stock to continue its ascent.

All factors considered, Verizon is a WAIT AND SEE.

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