Company ProfileÂ (obtained fromÂ Google Finance):Â Verizon Communications Inc. (Verizon) is a holding company. The Company is a provider of communications, information and entertainment products and services to consumers, businesses and governmental agencies. It operates in two primary segments: Verizon Wireless and Wireline. Verizon Wirelessâ€™ communications products and services include wireless voice and data services and equipment sales, which are provided to consumer, business and government customers across the United States. Wirelineâ€™s communications products and services include voice, Internet access, broadband video and data, Internet protocol network services, network access, long distance and other services. In November 2013, Verizon Communications Inc’s Verizon Digital Media Services acquired upLynk, a technology and television cloud company.
Defensive and Enterprising Investor TestsÂ (What is the significance of these tests, and what is PEmg ratio?):
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary (Calculator)
|Value Based on 3% Growth||$47|
|Value Based on 0% Growth||$27|
|Market Implied Growth Rate||3.56%|
|Net Current Asset Value (NCAV)||-$56.61|
Balance Sheet – 9/30/2013Â
Earnings Per Share – Diluted
Earnings Per Share – Modern Graham
Verizon Communications appears to be a solid opportunity worthy of further research by both Defensive Investors and Enterprising Investors. Â The only significant concern is that the EPS for 2013 is estimated to be down significantly from the last few years; however, it does not drag the EPSmg (normalized earnings) down enough to negatively affect the result. Â The company passes all of the requirements for the Defensive Investor, proving it has strong financials, and it also passes all of the requirements for the Enterprising Investor. Â As a result, these types of investors should pay close attention to the company and do further research to determine if it is suitable for their individual portfolios, keeping in mind the 7 Key Tips to Value Investing. Â From a valuation standpoint, the company fares well in the ModernGraham valuation model after having grown its EPSmg from $2.16 in 2008 to an estimated $3.22 in 2013. Â Since this level of proven historical growth outpaces the growth implied by the market, it is possible Verizon is undervalued.
What do you think? Â Is Verizon Communications undervalued? Â Is the company suitable for both Defensive Investors and Enterprising Investors? Â Leave a comment or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Verizon Communications at the time of publication and had no intention of purchasing a position in the next 72 hours.
Photo Credit: Â Andrew Magill