Verizon Communications (VZ) has been one of the most searched stocks on Zacks.com lately. So, you should look at some of the facts that could affect the stock’s performance in the short term.
Shares of this largest US mobile operator are up -5.2% over the past month, while the Zacks S&P 500 Composite is up -6.2%. The Zacks Wireless National industry, which includes Verizon, is down 4.7% over the period. The key question now is: Where could the stock head in the short term?
While news releases or rumors of a material change in a company’s business prospects will usually “trend” the stock and result in an immediate price change, there are always some basic facts that ultimately drive the buy-and-hold decision.
Revisions to earnings estimates
Rather than focusing on anything else, at Zacks we prioritize assessing the change in a company’s earnings outlook. This is because we believe the fair value of its stock is determined by the present value of its future income streams.
Essentially, our analysis is based on how sell-side analysts who cover the stock revise their earnings estimates to reflect the latest business trends. As earnings estimates for a company increase, so does the fair value of its stock. And when a stock’s fair value is higher than its current market price, investors tend to buy the stock, causing its price to move higher. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
For the current quarter, Verizon is expected to report earnings per share of $1.28, down -9.2% from the same quarter last year. The Zacks consensus estimate is down -0.9% over the last 30 days.
For the year-to-date, the consensus earnings estimate of $5.19 indicates a change of -3.7% year-on-year. In the last 30 days, this estimate has changed by -0.2%.
For the next fiscal year, the consensus earnings estimate of $5.29 shows a +1.9% change from what Verizon was expected to report a year ago. Over the past month, the estimate has changed by -0.6%.
With an impressive, third-party audited track record, our proprietary stock ranking tool – the Zacks Rank – is a more meaningful indicator of a stock’s short-term price performance by effectively harnessing the power of earnings estimate revisions. The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, has resulted in a Zacks #3 rank (Hold) for Verizon.
The chart below shows the development of the company’s 12-month consensus EPS estimate:
12 Month EPS
Projected sales growth
As such, while earnings growth is arguably the best indicator of a company’s financial health, nothing happens when a company is unable to grow its earnings. After all, it’s nearly impossible for a company to grow its profits over a sustained period of time without increasing sales. Therefore, it is important to know a company’s potential revenue growth.
For Verizon, the consensus revenue estimate for the current quarter of $33.74 billion indicates a +2.5% year-over-year change. For the current and next fiscal year, estimates of $136.33 billion and $138.29 billion indicate changes of +2% and +1.4%, respectively.
Latest reported results and surprise history
Verizon reported revenue of $33.79 billion for the most recent reported quarter, a +0.1% change year over year. EPS of $1.31 for the same period compared to $1.37 a year ago.
Compared to the Zacks Consensus estimate of $33.74 billion, reported earnings represent a surprise of +0.16%. The EPS surprise was -2.24%.
In the past four quarters, Verizon has twice beaten consensus estimates for earnings per share. The company topped consensus estimates for sales three times during that period.
No investment decision can be efficient without considering a stock’s valuation. When predicting the future price development of a stock, it is crucial to determine whether its current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects.
Comparing the current values of a company’s valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), with its own historical values will help determine if the stock is fair valued, overvalued or undervalued. Comparing the company versus its peers using these parameters gives a good sense of the reasonableness of the stock price.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to rank stocks from A to F (an An is better than a B; a B is better than a C; etc.) is quite helpful in determining whether a stock is overvalued, correctly valued, or temporarily undervalued.
Verizon is rated A on this front, indicating it is trading at a discount to its peers. Click here to view the values of some of the assessment metrics that led to this grade.
The facts discussed here and plenty of other information on Zacks.com might help determine whether or not the Verizon market clamor is worth paying attention to. However, its No. 3 Zacks rank suggests that it could move in line with the broader market in the near future.
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Verizon Communications Inc. (VZ): Free Stock Research Report
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