Image used under license from Shutterstock.com
Jack Hough writes in Barron’s that there’s more than meets the eye to telecom performance.
Verizon Communications shares have been laid low by the Great Wireless Price War of 2017. But how many of its customers feel as though service has suddenly gotten cheap? Not many, we’d wager.
The truth is, cellular competition this year has been little different than before, apart from some statistical quirks that made it appear as if the bottom were falling out of the market this past spring. If anything, a long price war is now easing, not worsening. For the third quarter, Verizon reported its first sequential improvement in services revenue in three years. Overall, it is on track to bring in about as much revenue this year as last year. In 2018, it could even return to modest growth.
That leaves Verizon stock (ticker: VZ), which has underperformed the Standard & Poor’s 500 by 28 percentage points this year, looking like a bargain. Its archrival in wireless, AT&T (T), meanwhile, is embroiled in a battle over its $85 billion deal for Time Warner (TWX).
Cellular providers sell a staple good—one that stays in demand in good years and bad. That’s not unlike Consolidated Edison (ED), Altria Group (MO), and General Mills (GIS), which sell New York City power, Marlboro cigarettes, and Cheerios, respectively, and trade at 21, 19, and 17 times projected earnings for the next four quarters. Yet Verizon recently traded at just 12 times earnings.
Moreover, “staple” is something of a misnomer; the relative importance of nearly all goods changes over time. Electricity use has flattened as a result of efficiency gains; packaged foods are losing market share to fresh foods; and cigarettes face a threat from the Food and Drug Administration, which plans to begin limiting nicotine to nonaddictive levels. But people are as fixated on their smartphones as ever, and the list of things to do with speedy wireless service will only grow. That’s one reason Verizon deserves a higher share price.
Read more here.
Jeremy Jones, CFA
Latest posts by Jeremy Jones, CFA (see all)
- Cities of the Future - August 17, 2018
- Is Voice Shopping Already Dead? - August 16, 2018
- A $35k House that Makes its Own Water, Grows Food, and Is Energy Self-Sufficient. - August 15, 2018