VZ: Gauge Analysis (updated February 25, 2021)

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

VZ: Earnings Report for the Quarter Ending December 31, 2020

Verizon Communications reported before the market opened on January 26, 2021, it earned $1.11 per diluted share in the quarter that ended on December 31, 2020, down 10 percent from earnings of $1.23 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Adjusted earnings, a non-GAAP figure, rose 7 percent to $1.21 per share from $1.13 one year earlier, a much better change than the GAAP percentage. The principal exclusions contributing to the $0.10 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Severance, pension and benefits charges [$0.08 per share], and Net loss on disposition of business [$0.03 per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by Verizon to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by Verizon's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  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.  Verizon's wireless business is second only to AT&T in the U.S., and in September 2020, Verizon announced it would acquire Tracfone, the leading pre-paid and value mobile service provider.  The industry is now transitioning to 5G technology. 

The following table is a simplified version of Verizon's Income Statement for the quarter that ended in December 2020, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided for comparative purposes.

Revenue in the December 2020 quarter totaled $34.7 billion, about the same as last year. The Consumer business was responsible for 69 percent of overall revenue, and this unit's revenue percent fell by 1.2 percent compared to the year-earlier result. The Business business contributed 23 percent of revenue, and this unit's revenue was essentially unchanged.

I was expecting Verizon to report revenue of $33.8 billion for the December 2020 quarter.  The actual amount surpassed my estimate by $917.0 million (2.7 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $14.8 billion in the latest quarter, which translates into a Gross Margin of 57.3 percent of revenue. Since it was higher than the 55.1 percent Gross Margin achieved in the year-earlier quarter, it signifies that Verizon sold its products and services at more profitable prices relative to production costs. I was expecting the Gross Margin to be 60.0 percent in the December 2020 quarter, and Verizon missed that prediction by 2.7 percent.

Sales, General, and Administrative expenses totaled $8.5 billion in the December 2020 quarter, up from $8.2 billion one year ago.  SG&A expenses increased from 23.6 percent to 24.5 percent of quarterly revenue, which shows Verizon spent more per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 23.5 percent of revenue, and the actual percentage turned out to be higher than the prediction.

Verizon's Operating Income was $7.2 billion in the quarter, up 8.1 percent from the year-earlier period.  Operating Income fell short of my $7.7 billion estimate by $554 million.

Interest and other non-operating items summed to a net expense of $927 million.  My estimate for non-operating items was $1434 million.

The effective income tax rate rose to 24.5 percent, which had a negative effect on net income.  I expected the tax rate to be 23.0 percent.

Net income in the quarter attributable to Verizon was $4.6 billion, $1.11 per share.  The figures for the year-earlier quarter were $5.1 billion, $1.23/share. My earnings estimate for Verizon in this quarter was $4.7 billion ($1.14/share).

In summary, Verizon Communications earned in the December 2020 quarter much less than I had expected. The company had better-than-predicted Revenue growth, but the company did worse  than I had anticipated with Gross Margin, Operating Income growth, and the Income tax rate.

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #verizon    #vz    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

VZ: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Verizon's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available on January 26, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Verizon.

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.  Verizon's wireless business is second only to AT&T in the U.S., and in September 2020, Verizon announced it would acquire Tracfone, the leading pre-paid and value mobile service provider.  The industry is now transitioning to 5G technology. 

Shares of Verizon now trade for about $59 each, and the company's market value is about $240 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.

Verizon recorded profits of $18 billion on revenue of $128 billion during the last year. In the quarter that ended on 30 September 2020, Verizon earned $1.25 per share (excluding certain items), which beat the $1.22 Wall Street consensus forecast. See https://tinyurl.com/y5ej5n6w for Verizon's most recent quarterly report.

Revenue in the September 2020 quarter totaled $31.5 billion, 4% less than last year's $32.9 billion. The Consumer business was responsible for 69% of overall revenue, and this unit's revenue fell by 4.3% compared to the year-earlier result. The Business business contributed 25% of revenue, and this unit's revenue fell by 1.7%.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Verizon's management communicated their expectations for the December 2020 quarter last October.  

Outlook and guidance

Based on three quarters of resilient earnings and projected trends into fourth-quarter 2020, Verizon is updating financial guidance for full-year 2020:

•The company now expects adjusted EPS growth (non-GAAP) of 0 to 2 percent, an update from prior guidance for 2020 adjusted EPS growth (non-GAAP) of -2 to 2 percent. This update includes the previously discussed accounting headwinds, impacts from COVID-19, and new device launches in fourth-quarter 2020.

•The company now expects total wireless service revenue growth of at least 2 percent in fourth-quarter 2020 compared to last year.

Verizon expects the following results for full-year 2020:

•Capital spending to now be at the higher end of the guided range of $17.5 billion to $18.5 billion.

•Adjusted effective income tax rate (non-GAAP) in the range of 23 percent to 25 percent.

Adjusted earnings per share (non-GAAP), excluding special items, in 2019 was $4.81, which indicates the company expects the equivalent figure for 2020 to be between $4.81 (zero percent growth) and $4.91 (2 percent growth) per share.  During the first nine months of 2020, adjusted EPS was $3.69.  This suggests adjusted EPS in the fourth quarter will be between $1.12 to $1.22.  GAAP EPS is typically lower, but the difference varies widely from quarter to quarter.

It's interesting that Verizon expects revenue from its wireless services to grow "at least 2 percent" in the fourth quarter because revenue from these services only increased 0.3 percent in the third quarter.  Wireless service revenue is just over half of Verizon's total revenue, and we can use the wireless guidance to predict overall revenue.

The following baseline Income Statement tries to take into account the information mentioned above, and it is more or less consistent with the company's historical results.  GAAP earnings are estimated at $4.72 billion ($1.14 per share).

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #verizon  #vz  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

Verizon Communications: Gauge Analysis (updated November 3, 2020)

I have analyzed Verizon's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis 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 evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation is weighted to favor companies that exhibit good value characteristics over firms that are fast growers but expensive.

An Overall Score of 60 or higher is a good result, and it signifies that the company has enough value-investment appeal to be worth examining in more detail.

First, a quick review of the company itself.

Verizon Communications is major provider of wired and wireless voice and data communications services to U.S. businesses and residential consumers. The company is now rolling out new services based on the latest 5G technology.  In September 2020, Verizon announced it would acquire Tracfone, the leading pre-paid and value mobile service provider in the U.S.

Verizon recorded profits of $18 billion on revenue of $128 billion during the last year. In the quarter that ended on 30 September 2020, Verizon earned $1.25 per share (excluding certain items), which beat the $1.22 Wall Street consensus forecast. See https://tinyurl.com/y5ej5n6w for Verizon's most recent quarterly report.

Shares of Verizon now trade for about $58 each.  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: $239.2 billion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.1 (>2.0 is conservative)

    Long-term debt/Working Capital = 4599% (<150% is conservative)

3. The Company Generates Stable Earnings: YELLOW

    Twenty positive quarterly earnings reports in last 5 years (perfect)

    Earnings variability = 29% (high)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 48% (terrific)

    Owner Earnings growth rate (five-year average) = 17% (good)

    Free Cash Flow growth rate (trailing year) = 21% (very good)

    Free Cash Flow growth rate (five-year average) = 30% (very good)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 24% (good)

    Operating Profit/Sales = 22.2% (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 = 47% of last year's FCF (sustainable)

7. The Company's Shares are Fairly Valued: GREEN

    Price/Owner Earnings (last year) = 9.3 (appealing)

    Price/GAAP Earnings (five-year average) = 12.3 (appealing)

    Free Cash Flow/Market Value = 9.1% (very appealing), more than the five-year average of 6.3%)

    Acquirer's Multiple = 12.2 (reasonable)

    Price/Book Value = 3.6 (less expensive than the five-year average of 6.1)

    Price/Sales = 1.9 (more expensive than the five-year average of 1.7)

In summary, the analysis assigned Verizon Communications five GREEN, one YELLOW, and one RED grades.  The resulting Overall Score is 70 of the 100 possible points, which is an excellent result.  The score is above the 60-point threshold, and, therefore, Verizon merits consideration by value investors.

Check back here occasionally for updates to the Overall Score, which can change when the company releases new financial results and when there's a significant change in the company's share price.

This analysis reported here is not, by any means, a complete evaluation of the subject company, and 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. Readers are encouraged to independently verify all data. Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  The analysis 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 methodology and results are subject to change without notification.

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 #verizon    #vz    #valueinvesting    #nac_financialanalysis