Verizon Communications: High-Quality Business Trading At An Attractive Discount To Intrinsic Value
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Summary:
- Verizon’s strong brand reputation, market share, and 5G leadership create high barriers to entry and support premium pricing and customer loyalty.
- The company’s focus on expanding fiber networks and wireless spectrum enhances network capacity, distinguishing it from competitors like AT&T.
- Verizon’s current stock price is undervalued, offering an attractive discount to its intrinsic value based on normalized earnings estimates.
- Key catalysts include increased free cash flow, higher 5G adoption, market share gains in broadband, and higher ARPU through service bundling.
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The following segment was excerpted from this fund letter.
Headquartered in New York, Verizon (NYSE:VZ) is one of the largest telecommunications companies in the U.S. The company was formed in 2000 with the combination of Bell Atlantic Corp. and GTE Corp., businesses with roots dating back to the late 19th century and the beginning of the telephone business.
Over the years, Verizon has expanded through strategic acquisitions and innovations, particularly in wireless technology, which has become the cornerstone of its business. Unlike its competitor AT&T’s (T) strategy of vertical integration through the acquisition of media and entertainment companies, which AT&T is now unwinding, Verizon has instead focused on expanding its fiber networks in major cities and acquiring wireless spectrum to increase network capacity and performance. Today, Verizon’s wireless services account for approximately 70% of its revenue (serving over 90 million postpaid and 20 million prepaid phone customers), making it the country’s largest wireless carrier. Verizon also offers fixed-line operations with local networks in the Northeastern U.S., serving over 30 million homes and businesses and nine million broadband customers. In early September, Verizon announced the $20 billion all-cash acquisition of Frontier, the largest pure-play fiber internet provider in the U.S. Upon closing (expected within 18 months), Verizon’s fiber network will expand to 31 states.
High-Quality Business
Some of the quality characteristics we have identified for Verizon include:
- Strong brand reputation for network reliability and speed, along with the broadest wireless coverage in the industry, supports premium pricing and customer loyalty in the form of low churn;
- Leading market share in wireless and economies of scale allow Verizon to generate high margins and returns on invested capital; and
- Verizon’s position at the forefront of 5G technology, combined with its spectrum licenses and the capital-intensive nature of building and maintaining network infrastructure, creates high barriers to entry.
Attractive Valutaion
Based on our estimates of normalized earnings, we believe Verizon’s current stock price is offered at a discount to the company’s intrinsic value. More specifically, we believe the company is trading at a CFRoEV greater than 10%, which translates to an attractive discount to intrinsic value.
Compelling Catalysts
Catalysts we have identified for Verizon, which we believe will cause its stock price to appreciate over our three- to five-year investment horizon, include:
- Higher FREE cash flow generation as prior large investments (e.g., 5G rollout and spectrum purchases) season, resulting in lower capital intensity;
- Enhanced revenue as more consumers upgrade to 5G-enabled devices, which should lead to increased data usage, higher-value service plans and an expanded customer base;
- Market share gains in broadband internet service as customers switch from traditional cable companies; and
- Increased connections per account and higher ARPU by way of Verizon’s ability to bundle services (like wireless, home internet and media content), which encourages adding more devices and drives higher overall spending.
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