On July 19, 2023, Verizon Communications Inc (VZ, Financial) saw a significant price change of 5.27%, with the stock trading at $33.97. The company, with a market cap of $142.8 billion and sales of $136.2 billion, has a GF Value of $53.65. But is this telecommunications giant a worthwhile investment or a value trap? Let's delve deeper.
Verizon Communications, the largest U.S. wireless carrier, primarily operates a wireless business that accounts for nearly 80% of its revenue and nearly all operating income. The company serves about 93 million postpaid and 23 million prepaid phone customers. Its fixed-line telecom operations include local networks in the Northeast and nationwide enterprise services.
Understanding the GF Value of Verizon Communications (VZ, Financial)
The GF Value is a proprietary valuation model developed by GuruFocus, estimating the intrinsic value of a stock based on historical trading multiples, an internal adjustment factor, and future business performance estimates. According to the GF Value, Verizon Communications (VZ) seems to be a possible value trap, warranting a second thought before investment.
The GF Value analysis suggests that if a company's share price significantly exceeds the GF Value Line, the stock might be overvalued, forecasting poor future returns. Conversely, if the share price is considerably below the GF Value, the stock could be undervalued, indicating higher future returns. With Verizon Communications' stock priced at $33.97 per share, it appears to be a potential value trap.
Assessing the Financial Strength of Verizon Communications
A company's financial strength is crucial in mitigating the risk of permanent capital loss. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. Verizon Communications has a cash-to-debt ratio of 0.01, ranking worse than 96.22% of companies in the Telecommunication Services industry, indicating poor financial strength.
Evaluating the Profitability of Verizon Communications
Consistent profitability over the long term reduces investment risk. Verizon Communications has demonstrated profitability over the past 10 years with a revenue of $136.2 billion and EPS of $5.14 in the past twelve months. The company's operating margin of 22.21% ranks better than 82.35% of companies in the Telecommunication Services industry, indicating fair profitability.
Growth Prospects of Verizon Communications
Growth is a critical factor in company valuation. Verizon Communications’ 3-year average revenue growth rate is worse than 64.3% of companies in the Telecommunication Services industry. Its 3-year average EBITDA growth rate is 3%, ranking worse than 55.39% of companies in the industry.
ROIC vs. WACC: A Measure of Profitability
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) provides another profitability measure. If the ROIC exceeds the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Verizon Communications’ ROIC was 6.38, while its WACC came in at 3.57.
Conclusion
In conclusion, Verizon Communications (VZ, Financial) appears to be a potential value trap. The company's financial condition is poor, and its profitability is fair. Its growth ranks worse than 55.39% of companies in the Telecommunication Services industry. To learn more about Verizon Communications stock, you can check out its 30-Year Financials here.
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