shares received a boost Wednesday from MoffettNathanson analyst Craig Moffett, who lifted his rating on the telecom giant to Buy from Neutral and changed his price target on the stock to $66 from $59.
His core thesis is that with the stock trading at just half of the broader market’s price/earnings ratio,
shares (ticker: VZ) are “simply too cheap.”
Moffett isn’t exactly a raging bull on Verizon, but he does see room for the stock to gain ground from here, even as the company continues to lose market share to
(TMUS), which he continues to recommend. He also maintains his Sell rating on
(T), which he sees as losing market share to both of its rivals and which is hampered by considerable leverage.
Moffett notes that T-Mobile’s combination with Sprint turned the domestic telecom market into a three-horse race, in which the two incumbent leaders were suddenly losing ground.
got stronger with their merger, which meant, as a mathematical certainty, that AT&T and Verizon got at least relatively less strong,” he writes. “The market still seems to be coming to grips with this simple reality; T-Mobile shares have outperformed AT&T’s by 85 percentage points year to date, and Verizon’s by 61, and the pace of outperformance has only accelerated of late.
“There’s obviously more at work here than simply relative strength in the wireless market—AT&T has been weighed down by an unrelenting stream of bad news in its non-wireless businesses—but there is inarguably a large element of simply acknowledging that a stronger T-Mobile will take share from AT&T and Verizon, and for a long time.”
But Moffett notes that the sustained underperformance of Verizon and AT&T has left the two telecom giants “decidedly cheaper,” dropping to all-time lows on a relative P/E basis compared with the broad market. Moffett notes that AT&T is actually the cheaper of the two, but for good reasons. He thinks AT&T’s heavy debt burden leaves it in a vulnerable position as it heads into the coming Federal Communications Commission’s auction of C-band spectrum, which the companies need for their growing commitment to 5G wireless.
“If AT&T does buy spectrum in the upcoming C-Band auction,” he writes, “their wireless business would be better for it…but their post-auction leverage ratio would be so high that a dividend cut would be all the more likely. If they don’t buy spectrum, then their largest and most important business would be just one more segment of the portfolio in decline. Unfortunately, neither looks like a good outcome. We’re sticking with our Sell rating and our target price of $24.”
He thinks the picture is brighter for Verizon. “No, Verizon isn’t as cheap as AT&T—its dividend yield spread versus the 10-Year [Treasury note] is roughly half AT&T’s—but it, too, trades at an unprecedented discount to the
and its relative yield versus the 10-Year remains near all-time highs,” he writes.
Moffett adds that “Verizon’s strategic position isn’t nearly so dire as AT&T’s.” He says that “at least for the near term, we expect Verizon’s ARPU [average revenue per user] will return to growth in 2021…as their premium unlimited plan penetration rises, as they anniversary the travel stoppages that came with Covid (even without assuming a strong return of travel), and as the drag from their ongoing promotion with
begins to be offset by customers exiting the initial promotional period. And, in contrast to AT&T, Verizon appears to be entering the C-Band auction from a position of strength.”
He adds that while “the upside here is not dramatic,” with an attractive and safe dividend yield in a yield-starved market,” the total return potential for Verizon shares is “sufficient to warrant our more constructive outlook.” Verizon shares yield 4.1%; AT&T yields 7.2%. T-Mobile isn’t currently a dividend payer.
Verizon shares were up 1.1%, at $61.25, in recent trading. AT&T was up 0.4%, at $28.98, while T-Mobile was up 0.1%, at $133.89. The S&P 500 was flat.
Write to Eric J. Savitz at [email protected]