Verizon Stock Seems To Have Peaked After Its 20% Recovery


We believe there may be better opportunities than Verizon stock (NYSE: VZ) at the present time. VZ trades at $59 currently and is at par with the levels seen at the beginning of this year. It traded at a pre-Covid high of $60 in February and has almost fully recovered to that level now. Also, VZ stock has gained around 21% from the low of $49 seen in March 2020, with the company focusing on investment in 5G expansion and tying up with Disney, which is expected to lower the subscriber churn rate. In view of its recent rally since March, we believe that the stock is close to its near-term potential and will likely see only a marginal rise from its current level. Our conclusion is based on our detailed comparative analysis of Verizon’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard.

2020 Coronavirus Crisis

Timeline for 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 45% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how VZ and the broader market performed during the 2007-08 crisis.

Timeline for 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

VZ vs S&P 500 Performance Over 2007-08 Financial Crisis

VZ stock declined from levels of around $24 in September 2007 (pre-crisis peak) to levels of around $16 in March 2009 (as the markets bottomed out), implying VZ stock lost 32% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of almost $20 in early 2010, rising by 22% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% .

VZ Fundamentals Over Recent Years Have Been Strong

Verizon revenues grew from $131.6 billion in 2015 to $131.9 billion in 2019, due to higher wireless and post-paid revenues. Along with higher revenue, margins improved over recent years with adjusted EPS increasing from $4.38 in 2015 to $4.66 in 2019. However, the company’s Q2 revenues saw a 5.1% y-o-y decline. Earnings came in at $1.18/share as against $1.23/share in the year-ago period, mainly due to lower revenue.

Does VZ Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

VZ’s total debt increased from $108 billion in 2016 to $112.8 billion at the end of Q2 2020, while its total cash decreased from $2.9 billion to $2.6 billion over the same period. However, the cash from operations has increased from $21.7 billion in 2016 to $35.7 million in 2019. The company generated CFO of $23.6 billion in the first half of 2020, and it appears to be in a good position to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-September 2020: Poor Q2 results, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Verizon stock has recouped the losses it suffered in late March, and currently trades around its pre-Covid peak. We believe that the stock is fairly valued and will largely trade sideways in the near future despite expectations of subdued growth in the number of new Covid-19 cases in the U.S. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.

As per Trefis, Verizon’s valuation works out to $62 per share, reflecting only a marginal upside from its current market price.

For deeper insight into the telecom war, see how Verizon compares with AT&T and also, why is Verizon falling behind T-Mobile?

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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