Verizon At $55 – Opportunity For Investors?

Verizon stock (NYSE: VZ) has rallied almost 10% since late March (vs. about 42% for the S&P 500) to its current level of $55. This is after falling to a low of $50 in late March, as a rapid increase in the number of Covid-19 cases spooked investors, and resulted in heightened fears of an imminent global economic downturn. The stock is currently about 5% below its February 2020 high of $58. Are the gains warranted or are investors getting ahead of themselves? We believe that the stock recovery is justified, and think the stock price is likely to increase further at a modest rate from its current level in the near term. Our conclusion is based on our detailed comparison of Verizon’s stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.

How Did Verizon Fare During 2008 Downturn?

We see VZ’s stock declined from levels of around $42 in October 2007 (the pre-crisis peak) to roughly $26 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 39% of its value from its approximate pre-crisis peak. This marked a drop that was smaller than the broader S&P, which fell by about 51%.

However, VZ’s stock recovered post the 2008 crisis to about $31 in early 2010 – rising by about 21% between March 2009 and January 2010, as against the S&P which bounced back by about 48% over the same period.

In comparison, VZ’s stock lost 14% of its value between 19th February and 23rd March 2020, and has already recovered 10% since then. The S&P in comparison fell by about 34% and rebounded by over 42%.

Is The Recovery Warranted & Can We Expect Further Gains?

The global spread of coronavirus in early 2020 affected industrial and economic activity. This is likely to adversely affect consumer spending power, which would lead to some drop in demand for the company’s traditional data services. Verizon’s revenues in Q1 2020 saw a decline of 1.6% on y-o-y basis, with Q2 also likely to see a revenue decline, though it could be far less than trends in other industries. The company has already withdrawn its full-year 2020 revenue guidance, whereas EPS growth has been revised downward to -2% to 2% from the earlier guidance of 2% to 4%.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. compared to the rate seen in April-May to boost market expectations. Additionally, the gradual lifting of lock downs is also giving investors confidence that developed markets have put the worst of the pandemic behind them. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.

Verizon is completely focused on expanding 5G technology which is expected to be the next big thing in the telecom space. As the global economy opens up and lock downs are lifted in phases, consumer spending is expected to pick up. At such a time, Verizon’s focus on expanding 5G technology could help it reap rich benefits in the medium term. Additionally, the tie-up with Disney for offering Disney+ to its subscribers is also expected to drive reduction in the subscriber churn rate. With investors’ focus shifting to 2021 numbers, and with Verizon’s revenues and margins projected to see healthy growth in 2021, this could help the stock to rise further from its current levels. Verizon’s valuation by Trefis gives us a fair price estimate of $62 per share for VZ’s stock, higher than its current market price.

So, while Verizon seems to have a modest upside from its current level, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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

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