Telecommunications stocks are said to be defensive, but Credit Suisse analyst Douglas Mitchelson wrote that Verizon Communications Inc. hasn’t quite lived up to that billing lately.
The stock has narrowly trailed the broader market this year, falling about 25% so far in 2022, as the S&P 500
has lost roughly 23%. Mitchelson noted that the declines came “as the impact from rising inflation and interest rates became clear to
investors” and as Verizon
lost share in its postpaid business during the first and second quarters amid a heavy promotional environment for the wireless industry.
Additionally, Verizon’s management team cut its 2022 outlook, even as executives opted to raise some wireless prices in a “rare” move, he said.
Can Verizon improve its standing on Wall Street? Maybe, Mitchelson said.
Investors in Verizon will eventually start looking at the name as trading at 8.5 times estimated 2023 free-cash flow, compared with 11 times 2022 estimated free-cash flow. As Wall Street makes that shift, “perhaps investors will begin to look at VZ once again as a defensive name,” he wrote.
Mitchelson is looking at a few factors that he thinks could determine Verizon’s future performance, including “the yield curve not moving any higher” and the company meeting its lowered forecast while showing “reasonable 4Q momentum” that could suggest a better year ahead. Further, he’ll be watching for signs of “wireless postpaid flow share stabilizing,” growing investor confidence in the company’s free-cash-flow targets for next year, and the absence of a dramatic slowdown in wireless industry growth.
Still, he isn’t ready to jump on the bull train just yet. “With the outlook for wireless competition and sector subscriber growth still uncertain, we remain Neutral,” he wrote in his late Monday note to clients as he cut his price target to $47 from $50, reflecting rate increases.
Looking to results for the third quarter, which Verizon is due to report on Oct. 21, Mitchelson sees indications that the company is “tracking in line” with its most recent forecasts.
Verizon shares closed down 0.1% in Tuesday’s session.