Impending price reversal with high returns

Verizon New York Stock Exchange: VZ has been on the verge of completing a turnaround for months and could do so now that first-quarter results are available. First-quarter results are mixed but include a better-than-expected margin, increased free cash flow, and reaffirmed guidance indicating slow, steady growth over the next two years.

The bottom line is that Verizon stock offers deep value, trading at 9 times this year’s earnings and 8.5 times next year’s earnings, 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 out of critical resistance and begin a sustained uptrend. In this scenario, price action could rise 50% or more as the telco rises within a well-defined trading range.

Verizon shares rise on mixed results and reaffirmed guidance

Verizon didn’t report a strong quarter, but no one expected strength. The results are mixed compared to the consensus reported by Marketbeat, with revenues below target and earnings above, but what the market cares about is not growth but cash flow. Free cash flow improved by nearly 18% despite a year-over-year decline in earnings, leading to improved balance sheet and dividend strength.

Overall revenue of $33 billion was 70 basis points below consensus but up 0.3% from last year. Revenue growth was primarily due to higher prices offset by mix and number of subscribers. Total wireless grew 3.3%, led by hypergrowth in the fixed broadband segment, which nearly doubled revenue.

Margin and earnings news are mixed but supportive of the investment thesis. Reported and adjusted EPS declined compared to last year and compared to revenue growth, but the contraction was smaller than expected. The adjusted value of $1.15 is down $0.05, but is $0.03 higher than consensus and internal metrics are more favorable. Consolidated adjusted EBITDA grew by $0.02 billion to $12.1, and free cash flow increased in the high teens.

Verizon’s dividend is safe for 2024 and 2025

The cash flow has led to a slight reduction in debt and an improvement in healthy leverage ratios. Long-term debt is 2.6 times adjusted EBITDA, with cash flow expected to remain strong this year, so debt should continue to decline. Long-term debt is down 2.7% year over year and net long-term debt is 2.8%, leaving dividend coverage in good enough shape for investors to expect the 20th consecutive dividend increase before the end of the year.

The trend in analyst sentiment is bullish for the market and is expected to continue now that the results are in. Until otherwise indicated, the consensus for the stock is a Moderate Buy with a price target of $44.50. This target is approximately 10% above the pre-release closing price and, once achieved, reaches a multi-year high. Revisions drive the market, making a move above consensus possible.

Verizon Technical Outlook: Reversal with Range Possibility to Persist

Verizon trades within a smaller range within a much broader multi-year range. It is indicated higher after the first quarter release and could rise to test or break resistance at the high end of the range. This is around $42.50 and a very long-term moving average. If resistance is broken above this level, it will indicate a reversal; otherwise, this stock could remain range-bound through the end of the year. If the market can move higher, the next resistance targets are $44.00 and $46.00. Returning to $39 or lower is possible if a new high is not set.

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