Verizon has been treading water for the past six months, holding steady at $48.69. The stock also fell short of the S&P 500’s 12.9% gain during that period.
Is there a buying opportunity in Verizon, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Verizon Will Underperform?
We’re cautious about Verizon. Here are three reasons you should be careful with VZ, plus one stock we’d rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Verizon struggled to consistently increase demand as its $138.9 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of poor business quality.
2. Projected Free Cash Flow Gains to Pump Profits
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Verizon’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 15.5% for the last 12 months will increase to 16.6%, giving it options for capital deployment (investments, share buybacks, etc.).
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, Verizon’s ROIC averaged 2.3 percentage point decreases each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping consumers, but in the case of Verizon, we’re out. With its shares lagging the market recently, the stock trades at 9.5× forward P/E (or $48.69 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Verizon
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