Valuation: Verizon Communications (VZ)

Company Profile: Verizon Communications (VZ) (obtained via Thomson One Banker)

Verizon Communications. The Group’s principal activities are to provide wireline and wireless communication services. The Group operates in two segments: Wireline: provides communication services including voice, broadband video and data, next generation IP network services, network access, long distance services, carriers, business and government customers both domestically and globally. Domestic Wireless products and services include wireless voice and data services, paging services and equipment sales. The Group operates in more than 150 countries globally.

Business and management review:
1) Is the business simple and understandable:

At one point the telecommunications industry was but in the dawn of the internet, reliance on cellular phones, and more and more mobility it is becoming more complicated by the minute.  The simple part is to provide people with the service of being in touch.  So I guess one may call it simple.

2) Does the business have a consistent operating history?

Yes, for the past five years they have continued building market share and held their own in an extremely competitive industry.  They do have a little more fluctuation on a common income statement than one would like to see from year to year.

3) Does the business have favorable long term prospects?

Well with the nature of the technology beast it seems that they have broadened their spectrum to include broadband internet service.  This seems to be the best possible strategy for them and guarantees them more longevity than others who won’t branch out past wireless service.

4) Is management rational?

In finally settling their lawsuit against the government this week and just taking the loss in customer reimbursement; I think that they are looking more towards their long term goals.  They also seem to have been taking strides to reduce debt, even if it makes their current assets look lower than one would like, it leads me to believe again that they are more focused on the future.  And have the liquidity to pay off some debt.

5) Is management candid with its shareholders?

They also have an extensive investor website at http://www22.verizon.com/about/

6) Do they resist the institutional imperative?

If they didn’t, they wouldn’t have come this far in a technology sector.

Financial and Value review.

Defensive
Size of firm:
Market cap: $128.02 billion FAIL

Strong Financials:

Current ratio: .698 Far below threshold of 2 FAIL

Earnings Stability:
Positive net income for 10 years PASS

Dividend stability:
Dividend payment for 10 years PASS

Earnings growth:
Earnings have not grown more than 1/3 over past 10 years FAIL

P/E:
21.78—just over our threshold of 20  FAIL

Price to assets
P/B=3.14—also just over our threshold of 2.5.  FAIL

Failing 5 of 7 tests, fails the defensive investor side.

Overall:  Though I think that this has potential to be a long term gainer; according to Ben Graham’s investment guidelines this is not a good choice for the defensive investor.

Enterprising investor:

Somewhat strong financial situation:
That current ratio is the problem again; still less than 1.5  FAIL
Debt to net current assets is less than 1.1         PASS

Earnings stability:
Positive N/I for 5 years PASS

Dividend stability:
Currently pays a dividend PASS

Earnings growth:
Greater than 5 years ago PASS

Price:
Less than 150% of net tangible assets FAIL

Overall:

Since it passed 3.5 of 5 tests it would be suited for the enterprising investor not necessarily the best decision at this point; as it has higher risk than one may be looking for.

Valuation:
Our valuation puts this at $44.27

Opinion:
Since the company is trading at $44.42 we do not feel it is a suitable investment at this time (unless you use Verizon and would like to subsidize part of your wireless bills with dividend payments)

 None of the staff of ModernGraham held a position in Verizon (VZN) at the time of publication.  Please take a moment to review our Methods and Disclaimer.