Verizon (NYSE: VZ) has been on the brink of completing a reversal for months and may do so now that the Q1 results are in. The Q1 results are mixed but include better-than-expected margin, increased free cash flow, and reaffirmed guidance that points to slow, steady growth over the next two years.
The takeaway is that Verizon stock offers a deep value, trading at 9X this year’s and 8.5X next year’s earnings while yielding more than 6.5%. Because the results and outlook are solid, the dividend is safe, and the value is deep, Verizon stock could break above critical resistance and begin a sustained uptrend. In that scenario, the price action could gain 50% or more as the telecom rises within a well-established trading range.
Verizon Stock Rises On Mixed Results, Reaffirmed Guidance
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Verizon did not report a robust quarter, but no one expected strength. The results are mixed relative to the consensus reported by Marketbeat, with revenue below target and earnings above, but it isn’t growth but cash flow the market is interested in. Free cash flow improved nearly 18% despite a YOY decline in earnings, leading to balance sheet improvement and dividend strength.
The top-line $33 billion in revenue is short of the consensus by 70 basis points but up 0.3% compared to last year. The revenue growth is due primarily to higher prices offset by mix and subscriber count. Total wireless grew by 3.3%, led by hyper-growth in the fixed broadband segment, which nearly doubled revenue.
Margin and earnings news are mixed but favorable to the investment thesis. Reported and adjusted EPS fell compared to last year and versus top-line growth, but the contraction was less than expected. The adjusted $1.15 is down $0.05, but $0.03 ahead of consensus and internal metrics are more favorable. The adjusted consolidated EBITDA grew by $0.02 billion to $12.1, and free cash flow rose in the high teens.
Verizon’s Dividend is Safe for 2024 and 2025
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The cash flow led to a slight reduction in debt and an improvement in the healthy leverage ratios. Long-term debt is 2.6X adjusted EBITDA, with cash flow expected to remain solid this year, so debt should continue to fall. Long-term debt is down 2.7% YOY, and net long-term debt is 2.8%, leaving the dividend coverage in sufficient shape that investors can expect the 20th consecutive dividend increase later this year.
The trend in analysts' sentiment is bullish for the market and should continue now that results are in. Until otherwise indicated, the consensus for the stock is a Moderate Buy with a price target of $44.50. That target is about 10% above the pre-release closing price and a multi-year high when reached. The revisions lead the market, making a move above the consensus possible.
Verizon Technical Outlook: Reversal With a Chance the Range Will Persist
Verizon is trading within a smaller range inside a much larger, multi-year range. It is indicated higher following the Q1 release and may move up to test or break resistance at the range’s high end. That is near $42.50 and an ultra-long-term moving average. If resistance is broken at this level, it will indicate a reversal; otherwise, this stock could remain range-bound until later in the year. If the market can move higher, the next targets for resistance are $44.00 and $46.00. Returning to $39 or lower is possible if a new high is not set.
