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Verizon - guidance up

Nicholas Hyett, Equity Analyst | 21 October 2020 | A A A
Verizon - guidance up

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Verizon Communications Inc Com Stk US0.10

Sell: 53.62 | Buy: 53.63 | Change 1.28 (2.45%)
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Verizon's third quarter operating revenue fell 4.1% to $31.5bn due to lower customer activity and the timing of new device launches. Adjusted earnings per share were flat at $1.25.

Management has increased guidance for full year adjusted earnings per share growth to 0% to 2%, up from -2% to 2% previously. The group also expects wireless service revenue to grow at least 2% in the fourth quarter.

The shares were broadly flat in early trading.

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Our view

Verizon is one of the world's largest telecommunications groups. Operations are focused on the US, but there's a wide UK shareholder base, after it bought Vodafone out of a joint venture with a shares-plus cash deal in 2014.

Verizon operates through three main segments. The two main operating segments are Consumer and Business, and Verizon Media is the (smaller) third.

Consumer is by far the larger of the two primary segments, accounting for over two thirds of group revenue. It provides wireless and landline services directly to individuals and via wholesalers. It also sells devices like smartphones and laptops. The Business segment generates just under a quarter of revenue and provides similar services to companies and government organisations.

More broadband connections, and increasing demand for smartphones, have so far provided a favourable backdrop to the group. However, lockdowns and social distancing have made it harder to sell new equipment, and if we enter a prolonged recession demand may be reduced for some time. However, longer term the roll-out of 5G could end up being the "secret sauce" that helps the Internet of Things and other applications live up to their potential.

Falling debts mean the balance sheet is in good shape, and earnings and cash flows both look reasonable to us. The group's managed to find $8.3bn of cumulative savings since a $10bn plan was announced in 2018.

However, it's no one way ticket.

Traditional landline operations are in decline, and wireless data is a notoriously competitive market. It's hard to offer something meaningfully unique, so telecoms groups often end up competing mainly on price, which is rarely a good place to be.

What's more, with governments finding ways to squeeze more out of spectrum auctions, we wouldn't be surprised to see Verizon having to fork out significant sums on 5G in the not-so distant future. That would be on top of the everyday maintenance of its sprawling asset base. Capital expenditure has averaged $17bn over the last 3 financial years, and looks set to increase.

For now Verizon looks in reasonable financial shape, and the potential to provide the infrastructure behind a new age of connectivity is a clear attraction. But investors shouldn't forget it'll come with lofty demands on cash that would otherwise be finding its way back to shareholders.

Verizon key facts

  • Forward Price/Earnings Ratio: 11.7
  • 10 year average forward Price/Earnings ratio: 13.4
  • Prospective yield: 4.4%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third Quarter Results

The Consumer segment saw revenue fell 4.3% to $21.7bn, reflecting a significant decrease in wireless equipment revenue. Wireless service revenue fell 0.7% to $13.4bn and Verizon gradually reopened all of its retail stores over the quarter. Segment operating income fell 0.7% to $7.4bn.

Business revenues fell 1.7% to $7.7bn, of which $3.0bn was service revenue. This represents a 4.9% increase due to strong demand from the public sector and small and medium sized businesses. Segment operating income was $923m, down 5.5% on last year.

Verizon Media revenues were down 7.4% to $1.7bn, which was a 21.2% improvement over Q2.

Verizon's operating cash flow has reached $32.5bn year-to-date, a $5.7bn increase on the same period last year. Management attributed this to a strong business performance, the timing of tax payments and one off pension and voluntary redundancy related payments in 2019 that weren't repeated.

Capital spending totalled $14.2bn so far this year, and is expected to be at the top end of the $17.5bn to $18.5bn guidance range for the full year.

Verizon's net unsecured debt fell $1.3bn to $96.5bn, which is 2.1 times adjusted cash profits (EBITDA). The company remains focussed on bringing this ratio down to between 1.75 and 2 times.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.