What You Need to Know About VZ

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
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.