Verizon: Buy Recession Discount Despite Poor Performance Vs. AT&T and T-Mobile (NYSE:VZ)

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investment thesis

T, VZ and TMUS performance metrics

performance metrics

looking for alpha

Verizon (New York Stock Exchange:VZ) has continued to underperform with slower growth across the board, especially made worse by the year-over-year increase in postpaid phone churn from 0.74% to 0.92%. Compared to AT&T (T) and T-Mobile (TMUS) excellent performance on their recent Q3 2022 earnings call, no wonder VZ shares are down -28.26% YTD vs. T down -4.29%, recovery from TMUS of 29.9% and the S&P 500 Index of -21.85% at the same time.

T, VZ and TMUS YTD share price

T, VZ and TMUS YTD share price

looking for alpha

VZ’s competitors are naturally trading optimistically, with a notable rally of 25.63% and 13.01% from the recent low in mid-October, significantly boosted by its lofty FY2022 forecast. Clearly T’s takeover strategy has worked, putting our previous bearish sentiments to sleep. In addition, the company continues to report improvements in its postpaid telephony ARPU of 1.6% QoQ, despite growing inflationary pressure and a worsening macroeconomy. Meanwhile, TMUS naturally outperformed the competition with record postpaid customer net additions of 1.62 million in the third quarter of 2022, further helped by the year-over-year slowdown from 0.96% to 0.88%.

The only thing that really saves VZ is its current dividend yield of 6.91%, which has continued to grow since our first article in July 2022 from a yield of 5.05%. Naturally only suitable for those with a stomach for volatility, given the company’s poorest performance so far.

How does your financial performance compare?

T, VZ and TMUS Revenue, Net Income (in billions of dollars), %, EBIT % and EPS

Revenue, net income (in billions of dollars), %, EBIT % and EPS

S&P Equity CI

Despite the alleged demand destruction, VZ continues to deliver strong results in the third quarter of 2022, with revenue of $34.24 billion, net income of $5.56 billion and EPS of $1.32. These numbers have shown promising quarter-on-quarter improvement, pointing to the stock’s overly beaten state at extreme 11-year lows. T also reported a decent EBIT margin and adj. Quarterly EPS expansion after Warner Brothers divestment in H1 2022, pointing to a potential change in its forward run and profitability.

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T, VZ and TMUS Cash/Equivalents, FCF (in billions of $) %, Debts and Dividends

Cash/Equivalents, FCF (in billions of $) %, Debts and Dividends

S&P Equity CI

Both T and VZ reported rich free cash flow (FCF) generation of $4.17 billion and $5.21 billion for Q3 2022, albeit notably down -11.8% QoQ/-19.2% YoY and -11.7% quarter-on-quarter/-6.5% year-on-year, respectively. This is due to its elevated capex of $19.4 billion and $22.2 billion in the trailing twelve months (LTM), indicating an increase of 30.7% and 29.1%, sequentially.

On the other hand, TMUS continues to record an impressive 18.8% QoQ and 42% YoY growth in its FCF generation for Q3’22, due to its well-controlled capital investment of $13.5B during LTMs, indicating a minimal notable increase. of 2.35%. sequentially. Combined with the fact that the company doesn’t pay dividends (among other things), it’s no surprise that TMUS reported lower long-term debt and higher cash/equivalents on its balance sheet, despite the Sprint merger in 2020.

Meanwhile, T and VZ are doing relatively well with dividend yields of 6.09% and 6.91%, respectively, pointing to a massive improvement from their 5-year average yield of 2.77% and 1 .93%, compared to the 4-year industry median of 3.55%.

Projected growth through fiscal year 2024

Projected growth through fiscal year 2024

S&P Equity CI

However, we must also highlight the slowdown in growth in T&VZ’s results until fiscal year 2024, although the former and TMUS are also expected to register an impressive expansion in their FCF generation at the same time. In contrast, it appears that TMUS has not received the impending recession memo, given the aggressive projected growth in its EPS at a CAGR of 30.4% to $9.46 for FY2024. Stellar indeed, against estimates of T of $2.64 and VZ of $5.08 at the same time.

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Due to all the factors discussed above, TMUS is hanging in the balance due to its dangerously high premium, with an interestingly optimistic price target of $176 and an 18.41% upside, even after its massive rally thus far. The stock is likely to tumble at the slightest whisper of slowing growth as it is also trading well above its 5-year average EV/Income valuations. Opportunistic investors may also want to take some profits off the table first, as they can always be added later during dips.

Another interesting approach would be to sell some TMUS to Deutsche Telekom (OTCQX:DTEGF), which owns approximately 48.4% of the former’s outstanding shares, which you can learn more about here. Its dividend yields of 3.46% also look decent.

In the meantime, we encourage you to read our previous article, which will help you better understand your market position and opportunities.

  • Lo and Behold Verizon at 10Y Low – Will We See Higher Yields Soon?
  • Verizon: The Fed will be the ultimate test

So are VZ and TMUS shares a buy?sell or hold?

T, VZ and TMUS 5 years EV/Revenue

T, VZ and TMUS 5 years EV/Revenue

S&P Equity CI

T is currently trading at a moderate EV/NTM income of 2.51x, rising below its previous rut, while VZ remains too beaten at 2.42x, approaching its 5-year low of 2.32x. Meanwhile, TMUS shares are trading dangerously bullish on EV/NTM earnings of 3.56x, approaching their 5-year highs of 3.64x.

T, VZ and TMUS 5Y P/E Titrations

T, VZ and TMUS 5Y P/E Titrations

S&P Equity CI

It is evident that Mr. Market is very confident that TMUS will continue to deliver massive growth despite the looming recession, given its similarly high NTM P/E of 20.53x, compared to T at 7.19x and VZ at 7.48x coming close. at a minimum of 5 years. . However, consensus estimates remain bullish on the outlook for T and VZ, with price targets at $20.43/$46.78 and 11.15%/24.35% above current prices.

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Depending on how Mr. Market reacts to the upbeat results of October’s CPI reports and the Fed’s assumed pivot for the December meeting, we may see more short-term bubbly optimism ahead. Furthermore, VZ may have found its lowest sustainable levels here, thanks to the poorest results so far. Therefore, bottom fishing investors can potentially bite into these 11-year lows. Investors who had loaded up on previous lows would have enjoyed stellar dividend yields of 7.6% for fiscal 2024. Naturally, investors should ignore the noise about value destruction thus far, as VZ should not be seen as a high-growth stock, but more as a possibly blue-chip dividend stock.

On the other hand, while its debt levels have also moderated somewhat from highs of $149.29 billion in Q1 2021 to $135.19 billion in Q3 2022, investors should watch. Take into account its dazzling $3.24 billion interest expense on the LTM. Additionally, the company is eyeing a massive $28.16 billion long-term debt maturity within the next five years. Combined with the whopping $10.69B of dividends paid on the LTM, portfolios should also be sized appropriately as the worst of the recession is yet to come.

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