Verizon Communications (VZ) delivered on its numbers. Widely watched fourth-quarter wireless revenue returned to growth for the first time in two years (1.7 percent) as the company added 1.2 million net new postpaid (contracted) customers for the year, asserts Roger Conrad, editor of Conrad's Utility Investor.
Churn declined by another 11 basis points to 0.77 percent, by far the lowest in the US wireless communications industry and the clearest possible affirmation the company still has the best-in-class network. And the company didn’t sacrifice profitability to achieve that, with EBITDA margin increased to 39.8 percent from 36.9 percent a year ago.
The other big news from this earnings and guidance report is that Verizon will receive a one-time earnings benefit from the changes in the tax law of $16.8 billion, to be followed by additional annual cash flows of $3.5 to $4 billion.
That’s one of the most positive outcomes for a company from Congress’ tax plan and it greatly boosts the company’s financial flexibility to reduce debt and fund projects.
The focus of Verizon’s capital expenditures this year will be the commercial launch of advanced 5G communications services to up to five US cities, starting with Sacramento, CA.
The company has been putting needed wireless spectrum and fiber optic broadband infrastructure in place for the better part of this decade. And global 5G protocols agreed to in December established Verizon as the clear US leader in developing needed standards for seamless broadband in reliability, throughput and latency.
During the company’s earnings and guidance call, CEO Lowell McAdam forecast low single-digit revenue and earnings growth for 2018, picking up steam starting in 2019 as 5G gains traction. That positive message coupled with recent results appears to have reawakened the company’s share price, pushing it above our target of $52.
We’re bullish too. But it’s important to remember that Verizon’s is basically an evolutionary growth story. And while a price of less than 12 times consensus 2018 earnings per share is a steep discount to the S&P 500’s 18.8 times, the company does operate in an industry that’s paradoxically both fiercely competitive and highly regulated.
We expect the stock to break out to a much higher level over the next couple years as Verizon executes on its 5G strategy. But there’s plenty of potential headline risk that could cause pullbacks in the meantime. Those who didn’t get in last fall when the stock was 20 percent cheaper should be patient and wait for a dip. Verizon is a buy below $52.
