Valuation analysis for Verizon Communications Inc.(NYSE:VZ)
Last week's volatility should prompt you to understand the fair value of the stocks you own, and therefore Stock Traders Daily has made material valuation observations for all 3000 stocks it covers, and it is making its findings on the DJIA components public by offering them one at a time. This is the twenty third public fair value report.
Verizon Communications Inc.(NYSE:VZ) has been growing earnings and revenue solidly, at a rate more consistent with growth from companies much more aggressive by definition than Verizon. According to our review of trailing 12 month yearly growth rates, which are filtered to exclude onetime events, Verizon has been growing earnings at a rate above 20% for the past three quarters and has been growing consistently since the second quarter of 2013.
Although analysts are only looking for a 10% growth rate going forward, even a 10% growth rate would make shares of Verizon attractive on a valuation basis. Shares of Verizon were trading with a PE multiple of about 23 not so long ago, back in the second quarter of 2013, but interestingly, as earnings growth was experienced the PE multiple contracted and is now near 15 times earnings. This is a valuation not seen since 2011.
Furthermore, relative to growth, this PE multiple is quite attractive as it makes the peg ratio for Verizon less than one, currently at 0.62. Even if the growth rate for Verizon declines from over 20% to 10% the PE multiple that currently exists when compared to that lower growth rate would still be attractive on a valuation basis. Verizon would need to contract much more and grow much slower in order for valuation concerns to increase measurably.
According to our real time trading report for Verizon the stock recently broke below longer term support and that is a technical red flag. Arguably, the trading channel for Verizon is relatively tight, but according to rule we cannot be buyers of stocks under longer term support, especially when longer term support levels begin to break. That makes Verizon an avoid at current levels on a technical basis.
Although Verizon actually looks quite attractive on a fundamental valuation basis, there are some underlying concerns. It is interesting that the multiple contracted while earnings growth was realized, but that may be solely due to the nature of the business. What's more concerning is that the stock has begun to break below longer term support, which is a support level based on its longer term trading patterns. Although on a fundamental valuation basis the stock appears to be a good value, we cannot condone buying shares of Verizon so long as the stock remains under longer term support. Only if the stock increases beyond the converted resistance line that was once longer term support would we be okay buying Verizon. Unless that happens it is an avoid.