Markets
S

Verizon Earnings Were Good News for VZ Stock — and Everyone Else, Too

An image of stocks on a display
Credit: Shutterstock photo

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

I've long been skeptical, if not outright bearish, toward U.S. wireless operators like Verizon (NYSE: VZ ). And so I haven't been surprised that Verizon has been "dead money." Indeed, over the past five years, VZ stock has risen just 1.2% in total , though dividends have provided a modest return.

One of the big reasons for that stagnant performance has been the market's concern about pricing - and margins. The intense competition between Verizon, AT&T (NYSE: T ), Sprint (NYSE: S ), and T-Mobile (NASDAQ: TMUS ) has created what I called last year a circular firing squad . Verizon itself last year had to bring back unlimited plans - after insisting for years it wouldn't do so - as Sprint and T-Mobile were able to peel away customers through their own offerings.

But there are some signs of optimism in terms of pricing in Verizon's Q2 report on Tuesday. That, combined with some external help, could lead VZ stock to eventually break out of its long-term range.

Verizon Earnings

So far, the market has pretty much shrugged at Verizon's report. VZ stock rose about 1.5% on a mixed day for the markets. But there is some good news here.

Revenue of $32.2 billion rose 5.4%, a little over a point better than Street estimates. A new revenue recognition standard provided a modest boost, accounting for about half the top-line beat. Wireless revenue rose a solid 4.7% even without the accounting change, and Verizon raised full-year guidance to low- to mid-single-digit growth on a consolidated basis.

Adjusted EPS grew nicely, rising 25% to $1.20 from 96 cents the year before. That figure came in 6 cents ahead of consensus.

All that said, the risks to VZ stock still are present in the numbers. GAAP operating income declined 17% year-over-year, as margins fell sharply. Adjusted EBITDA - which excludes one-time items - did rise about 4%. But margins compressed year-over-year, and the profit gain came solely from the new accounting standard. Excluding that benefit, margins dropped 160 bps, with pressure in both wireless and wireline.

Reasons For Hope

That said, there was some progress here. Losses in content are contributing to some of the margin pressure, as is the wireline business. The wireless business posted a strong quarter, with nearly 400,000 net additions in the postpaid business. Churn remains low; as management pointed out, a 0.75% figure was the fifth straight quarter below 0.8%. (As a point of reference, Sprint's postpaid churn rate of late has been more than twice as high.)

And it does seem from the numbers like Verizon, finally, was able to hold the line on pricing , as a Wells Fargo analyst pointed out. That means that the cannibalization of the industry over the past few years - discounting more and more to steal customers from one another - might be moderating. And it could allow Verizon's free cash flow to start to grow, allowing for either debt repayment or a more aggressive move into content, like AT&T's acquisition of Time Warner .

Meanwhile, there's another potential boost to pricing coming: the long-awaited merger between T-Mobile and Sprint. That tie-up is not guaranteed to be approved, though Luke Lango argued last month the odds were good . At least in theory, a three-operator market would be less competitive than four - and perhaps give all the operators a bit of breathing room, and some respite from the endless game of one-upmanship that has hurt earnings growth across the sector.

Is VZ Stock a Buy?

All told, I can see a glimmer of hope for VZ coming out of the report. The stock remains reasonably cheap, with a forward P/E below 11x and a dividend yield at 4.6% as of this writing. Even flat earnings and cash flow probably support steady returns for some time to come.

With cell phones pretty much an essential at this point, there's a defensive component here as well. Verizon probably holds reasonably well in a market correction. (VZ stock did fall almost 10% in the late January/early February correction, however.)

If pricing holds - or in a better-case scenario, starts to provide a tailwind - Verizon looks very cheap here. But there are two caveats. The first is that there's still thin evidence that industry-wide pricing has changed for good. Results from rivals would give better clarity on that front. Approval of the Sprint-T-Mobile merger isn't guaranteed, either.

The second is that if pricing is improving, I'd rather own T-Mobile. I still think that stock is the best pick in the space - and if it's getting Sprint at current prices ahead of an improvement in the industry, that only strengthens its case.

Still, there's reason to see some hope for Verizon - and income investors, in particular, may prefer its lighter debt load and 4%-plus yield. After years of basically zero capital appreciation, VZ stock could be ready to break out.

As of this writing, Vince Martin has no positions in any securities mentioned.

The Ultimate Marijuana Stock to Go Ballistic in the Next 90 Days

While we're on the subject of investments that can help you build great wealth …

It's very important that you know recreational marijuana is set to become legal in Canada this fall. The result will send selected Canadian marijuana stocks soaring.

If you act quickly, before most Americans catch on, you, too, could turn every $10,000 you invest into $30,000, $40,000, $50,000, or more.

Here's the full story and how you can get in on the ground floor.

More From InvestorPlace

Compare Brokers

The post Verizon Earnings Were Good News for VZ Stock - and Everyone Else, Too appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

S TMUS WFC T VZ

Other Topics

Stocks

Latest Markets Videos