I have analyzed Verizon Communications's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.
The analysis uses gauges to assess how well the company satisfies seven specific investment criteria. GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied. An Overall Score between zero and 100, which takes all gauges into account, is also computed. While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms. An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.
First, a quick review of the company itself.
Verizon Communications is a major provider of wired and wireless voice and data communications services to U.S. businesses and consumers. The company took its current form in 2000 when Bell Atlantic merged with GTE. In 2013, Verizon agreed to pay Vodafone $130 billion in order to assume complete ownership of Verizon Wireless, which had been a joint venture. In February 2021, Verizon announced it would be paying $45 billion for C-band spectrum licenses it won at an auction run by the Federal Communications Commission (FCC). Verizon plans to use this spectrum as part of its transition to the newest, fifth-generation ("5G") wireless technology. Separately, Verizon announced plans in September 2020 to acquire Tracfone, the leading pre-paid and value mobile service provider.
Verizon recorded profits of $18 billion, $4.30 per share, on revenue of $128 billion during the last 12 months. In the quarter that ended on December 31, 2020, Verizon earned $1.11 per share on a GAAP basis, and it gained $1.21 per share after non-GAAP adjustments and exclusions. See Verizon's most recent quarterly report and my review of their results relative to expectations for additional information.
Shares of Verizon now trade for about $57 each, giving the company a market value of $234 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.
Analysis Results:
Verizon's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments
1. The Company's Size is Substantial: GREEN
Market Value: $234.2 billion (mega-cap)
2. The Company is Conservatively Financed: RED
Current ratio = 1.4 (>2.0 is conservative)
Long-term debt/Working Capital = 825% (<150% is conservative)
3. The Company Generates Stable Earnings: YELLOW
Twenty positive quarterly earnings reports in last 5 years (perfect)
Earnings variability = 32% (high)
4. The Company Exhibits Earnings Growth: GREEN
Owner Earnings growth rate (trailing year) = -4% (poor)
Owner Earnings growth rate (five-year average) = 24% (very good)
Free Cash Flow growth rate (trailing year) = 32% (very good)
Free Cash Flow growth rate (five-year average) = 45% (terrific)
5. The Company is Efficiently Profitable: GREEN
Cash Flow Return On Invested Capital = 22% (good)
Operating Profit/Sales = 22.4% (excellent)
6. The Company Pays a Healthy Dividend: GREEN
Dividends paid for the last 7 years or longer
Dividend 5-year average growth rate = 2.2% (weak)
Dividend = 43% of last year's FCF (sustainable)
7. The Company's Shares are Fairly Valued: GREEN
Price/Owner Earnings (last year) = 10.2 (appealing)
Price/GAAP Earnings (five-year average) = 12.1 (appealing)
Free Cash Flow/Market Value = 10.1% (very appealing), more than the five-year average of 6.2%)
Acquirer's Multiple = 11.9 (inexpensive)
Price/Book Value = 3.4 (less expensive than the five-year average of 5.7)
Price/Sales = 1.8 (about the same as its five-year average)
In summary, the analysis assigned Verizon Communications five GREEN, one YELLOW, and one RED grades. The resulting Overall Score is 71 of the 100 possible points, which is an excellent result. The score is above the 60-point GCFR threshold, and, therefore, Verizon is worthy of deeper investment research.
Check GCFR2 occasionally to see how the Overall Score changes after the company releases a new earnings report or the share price rises or falls.
This analysis reported here is a limited evaluation of the subject company. It does not consider all material facts about the company's operations, finances, or future prospects. The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent. Readers are strongly encouraged to verify all data and perform their own independent analyses. Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk. This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.
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#verizon #vz #gauges #gcfr #gcfr2 #valueinvesting #nac_financialanalysis
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