Credit Suisse likes the long-term potential of Verizon Communications, but lowers his rating, saying that the near-term potential is limited.
Credit Suisse analyst likes the long-term potential of the telecoms company, but says the stock today is more of a show-me story.
Verizon Communications has the U.S.’s leading wireless phone business and is investing for the shift to next-generation 5G networks. But it’s just not growing much in the meantime, and the stock’s valuation seems full. That means investors may choose to stay on the sidelines until a positive catalyst for the stock becomes more clear.
On Monday morning, Credit Suisse analyst Douglas Mitchelson downgraded Verizon stock (ticker: VZ) to Neutral from Outperform. He kept his target price unchanged at $65 a share. Mitchelson noted that while the long-term picture for the telecom company is positive, the near-term is more of a show-me story.
Verizon took in $47.2 billion in earnings before interest, taxes, depreciation, and amortization, or Ebitda, on sales of $131.9 billion in 2019. But those figures were down 0.5% and up 0.8% from the previous year—not exactly inspiring growth.
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And spending is up. Verizon has stepped up its promotions in recent months, lowering the cost of some of its unlimited-data plans and adding perks like Walt Disney’s (DIS) new Disney+ streaming service for a year. That helped boost subscriber numbers last quarter, but didn’t translate to higher earnings.
Plus, the transition to 5G networks requires billions of dollars in investments in fiber optic cables, antennas, and potentially additional wireless spectrum licenses. Verizon had almost $18 billion of capital expenditures in 2019, and expects to spend a similar amount this year.
“Management expects these investments to result in accelerating growth into 2021, but we expect investors will take a wait-and-see attitude given the always uncertain wireless competitive environment and wireline secular headwinds,” Mitchelson wrote on Monday. “Further, investors remain concerned that Verizon does not have enough wireless spectrum to compete longer-term, though operational performance sustains at healthy levels.”
Verizon executives have said that they expect to see meaningful 5G-related revenues appear in 2021. A highly anticipated potential 5G Apple (AAPL) iPhone this fall could spur a big increase in consumer adoption, which has been slow thus far. But Mitchelson is also bullish on Verizon’s opportunity in 5G enterprise uses like the internet of things and mobile edge computing, essentially mini data centers distributed across the network.
“Still, with a current lack of catalysts and a valuation that is not attracting new investors, we see limited potential for shares near-term,” Mitchelson wrote. Verizon stock trades for about 7.5 times enterprise value to 2020 Ebitda, about equal to AT&T (T). The S&P 500 goes for 12.6 times EV to 2020 Ebitda.
Verizon stock was down 1.6% in midday trading on Monday, to $58.48, versus a 0.9% rise for the S&P 500 index and 0.7% bump for the Dow Jones Industrial Average. Verizon stock sports an annual dividend yield of 4.2%.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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February 04, 2020 at 04:24AM
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Verizon Stock Gets Downgraded. Why the Company Has Limited Near-Term Potential. - Nasdaq
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