Shares of Verizon Communications (VZ) moved 0.78 % Friday, bringing their 52 week performance to -26.4%. The stock seems to be fairly valued in terms of traditional metrics.
Verizon Communications Inc. is an American multinational telecommunications conglomerate and a corporate component of the Dow Jones Industrial Average. The large-cap Telecommunications company is based in New York, United States.
VZ's P/E Ratio Is Better Than the Sector Average
Compared to the Telecommunications sector's average of 18.85, Verizon Communications has a trailing twelve month price to earnings (P/E) ratio of 7.44 and an expected P/E ratio of 7.98. P/E ratios are calculated by dividing the company's share price by its trailing 12 month or forward earnings per share, which stand at $5.06 and $4.72 respectively.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Verizon Communications's P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.
Verizon Communications Is Overvalued in Terms of Expected Growth
Verizon Communications's PEG ratio is 5.51. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Verizon Communications's case, it tells us the company is overvalued.
VZ Has an Average P/B Ratio
Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.
Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Verizon Communications, the P/B value is 1.798 while the average for the Telecommunications sector is 3.12.
VZ's Weak Cash Flow Generation Is Troubling
The table below shows that Verizon Communications is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Verizon Communications's case, free cash flow is growing at an average rate of -14.59% with a coefficient of variability of 269%. We can also see that cash flows from operations are evolving at a 1.91% rate, versus 38.89%:
| Date Reported | Cash Flow from Operations (k) | Capital Expenditures (k) | Free Cash Flow (k) | YoY Growth |
|---|---|---|---|---|
| 2022-12-31 | $37,141,000 | $26,740,000 | $10,401,000 | 136.7% |
| 2021-12-31 | $39,539,000 | $67,882,000 | -$28,343,000 | -232.14% |
| 2020-12-31 | $41,768,000 | $20,318,000 | $21,450,000 | 26.86% |
| 2019-12-31 | $35,746,000 | $18,837,000 | $16,909,000 | -4.37% |
| 2018-12-31 | $34,339,000 | $16,658,000 | $17,681,000 | n/a |
Verizon Communications's Margins Are Strong
If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Verizon Communications's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.
Verizon Communications's Gross Margins
| Date Reported | Revenue (k) | Cost of Revenue (k) | Gross Margin | YoY Growth |
|---|---|---|---|---|
| 2022-12-31 | $136,835,000 | $45,169,000 | 66.99% | -3.05% |
| 2021-12-31 | $133,613,000 | $41,288,000 | 69.1% | 11.72% |
| 2020-12-31 | $128,292,000 | $48,939,000 | 61.85% | -3.6% |
| 2019-12-31 | $131,868,000 | $47,256,000 | 64.16% | 8.09% |
| 2018-12-31 | $130,863,000 | $53,178,000 | 59.36% | n/a |
Verizon Communications's Operating Margins
| Date Reported | Revenue (k) | Operating Expenses (k) | Operating Margin | YoY Growth |
|---|---|---|---|---|
| 2022-12-31 | $136,835,000 | $49,166,000 | 22.27% | -8.32% |
| 2021-12-31 | $133,613,000 | $45,156,000 | 24.29% | 8.2% |
| 2020-12-31 | $128,292,000 | $50,020,000 | 22.45% | -2.56% |
| 2019-12-31 | $131,868,000 | $48,650,000 | 23.04% | 35.37% |
| 2018-12-31 | $130,863,000 | $56,767,000 | 17.02% | n/a |
Verizon Communications's cost of revenue is growing at a rate of -3% in contrast to -2.46% for operating expenses. Sales revenues, on the other hand, have experienced a 0.92% growth rate. As a result, the average gross margins growth is 2.63 and the average operating margins growth rate is 6.54, with coefficients of variability of 6% and 13% respectively.
We See Mixed Market Signals Regarding VZ
Verizon Communications has an average rating of hold and target prices ranging from $64.0 to $33.0. At its current price of $37.66, the company is trading -15.24% away from its target price of $44.43. 1.01% of the company's shares are linked to short positions, and 64.22% of the shares are owned by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2022-12-31 | Vanguard Group, Inc. (The) | 8% | 354,645,505 | $13,355,949,664 |
| 2022-12-31 | Blackrock Inc. | 8% | 331,030,544 | $12,466,610,236 |
| 2022-12-31 | State Street Corporation | 4% | 175,359,283 | $6,604,030,571 |
| 2022-12-31 | Charles Schwab Investment Management, Inc. | 2% | 85,876,978 | $3,234,126,978 |
| 2022-12-31 | Geode Capital Management, LLC | 2% | 79,682,618 | $3,000,847,381 |
| 2022-12-31 | Morgan Stanley | 2% | 67,976,459 | $2,559,993,435 |
| 2022-12-31 | Bank of America Corporation | 1% | 62,054,338 | $2,336,966,359 |
| 2022-12-31 | JP Morgan Chase & Company | 1% | 48,168,949 | $1,814,042,611 |
| 2022-12-31 | Price (T.Rowe) Associates Inc | 1% | 48,058,216 | $1,809,872,407 |
| 2022-12-31 | Northern Trust Corporation | 1% | 47,100,597 | $1,773,808,475 |
