VZ Financial Report

VERIZON
(VZ)
FALL 2015
Telecommunications – Value Portfolio – Hold
Vincent Catucci
Quinnipiac University: FIN-450
Tel 914-438-6637
Class: Tuesday 6:00 p.m.

TABLE OF CONTENTS
Contents
Tear Sheet ________________________________________________________________________ 1
Company Overview ________________________________________________________________ 3
Financial Analysis__________________________________________________________________ 5
Sector & Industry Information ________________________________________________________ 7
Risk & Reward ____________________________________________________________________ 9
Summary________________________________________________________________________ 11
Model Outcomes__________________________________________________________________ 12
Ratio’s and Financial Statements _____________________________________________________ 15

VERIZON (VZ)
Tear Sheet

VERIZON (VZ)
INVESTMENT CASE
We are recommending a hold for VZ stock within the value portfolio of the
Telecommunications Sector.
MAIN REASONS WE SHOULD BUY VZ STOCK
1. Verizon has experienced a 5.4% increase in total revenue from the year prior. This is a
strong indicator of future growth, especially when taking Verizon's size into
consideration. We expect a neutral sales growth rate of 4% a year for the company.
2. The Telecom giant has $188.5 Billion in market cap and pays a dividend yield of
around 5.00%. As seen in Exhibit 1, Verizon’s dividend has steadily increased
throughout the years and we predict this trend to continue.
3. The company is a very safe bet with a beta of .69. The company also possesses an
Altman Z score of 1.34 which shows the odds of default to be unlikely. These qualities
make Verizon Communications the ideal stock choice for the Telecom value portfolio.
(Exhibit 1)

VERIZON (VZ)
Company Overview
GENERAL
“Verizon Communications Inc. (Verizon, or the Company) is a holding company that, acting
through its subsidiaries, is one of the world’s leading providers of communications,
information and entertainment products and services to consumers, businesses and
governmental agencies. With a presence around the world, we offer voice, data and video
services and solutions on our wireless and wireline networks that are designed to meet
customers’ demand for mobility, reliable network connectivity, security and control. Formerly
known as Bell Atlantic Corporation, we were incorporated in 1983 under the laws of the State
of Delaware. We began doing business as Verizon on June 30, 2000 following our merger with
GTE Corporation. We have a highly diverse workforce of approximately 177,300 employees.”
SEGMENTS
Verizon’s services consist of two primary segments wireless and wireline. The wireless
products and services include wireless voice, data services, and equipment sales. These
services are provided to consumers, businesses, and government agencies. While the Wireline
consists of voice, data, video communications, enhanced services, broadband video, corporate
networking solutions, data center, and cloud services. Verizon provides this comprehensive
range of services to fulfill all of their customer’s needs.
MARKETS
Verizon Wireless is the largest wireless service provider in the United States as measured by
retail connections and revenue. As of December 31, 2014, Verizon Wireless had 108.2 million
retail connections and revenues of approximately $87.6 billion. This number represents
approximately 69% of Verizon’s aggregate revenues. Their 4 G LTE network is available to

VERIZON (VZ)
over 98% of the U.S. population in more than 500 markets covering approximately
309 million people, including those in areas served by our LTE in Rural America partners.
SUBSIDIARIES
Verizon is constantly looking to acquire companies that will help them provide new and
innovative services. As of today, the company has acquired 13 main subsidiaries. The
companies include Verizon Wireless, AOL, Diamond State Telephone, New Jersey Bell, Bell
of Pennsylvania, Verizon North, The Chesapeake and Potomac Telephone Company, Verizon
California, Hughes Telematics, Terremark, EdgeCast Networks, International Computer
Security Association, CyberTrust. The most recent being the acquisition of AOL for 4.4 billion
or $50.00 a share.
STOCK
Bell Atlantic merged with GTE on June 30th, 2000, and changed their name to Verizon
Communications. The stock as of today trades at $45.82 and reports a dividend yield of
4.94%. The stock has a mean target of $50.27 and has a volume of 7,779,716. The stock sits
in the middle of their 52 week high and low of $38.06 and $50.86. Verizon Communications
has improved their earnings per share by 11.2% in its most recent quarter compared to the
same quarter the year prior. This upcoming year the markets predict an improvement in
earnings of $3.97 in relation to the past fiscal year of $2.51.

VERIZON (VZ)
Financial Analysis
We believe that Verizon Communications is in an excellent financial position that will allow
for future growth. When we analyzed the liquidity ratios, we found that VZ’s rates gave us
mixed signals. As for their current ratio, Verizon has managed to hold a ratio of .7x. This rate
is negative compared to the industry average of .9x. This outcome shows that the firm has less
short-term assets than short-term debt and, therefore, could leave VZ exposed to the volatility
of the market. Unfortunately, when we take a look at the quick ratio, we see that VZ drops
below the industry average again (1.3x) with an outcome of 0.6x. The lackluster results within
the liquidity ratios are directly related to VZ’s constant acquisitions. When Verizon acquires
these companies, they take out debt to fill the acquisition cost. As for asset management
ratios, VZ shows promising results. When looking at the company’s inventory turnover ratio,
Verizon sits over the average with a ratio of 46.1x compared to the industries 22.4x. Moving
on to their days-sales-outstanding, VZ continues to show positive results of 37.4 when
compared to the market DSO of 55.6. This shows that the telecom giant has been extremely
efficient in collecting its money. In the case of total asset turnover, the company has managed
to beat the industry average by 0.1x with a ratio of .6x. When looking at the debt ratios, VZ
begins to dip below the industry average. As for total debt-to-equity, the rates show that the
company is slightly riskier than the industry average. Verizon has managed to reach a debt-to-
equity ratio of a whopping 884.3% while the industry holds a 91.8%. This large jump in debt-
to-equity is for the most part directly correlated to the $130 billion acquisition of Verizon

VERIZON (VZ)
Wireless from Vodafone in 2014. Lastly, regarding profitability ratios, VZ looks excellent
compared to the Telecommunications sector. Verizon has a return on assets ratio of 5.5% while
the industry has an average ROA of 4.0%. This key statistic shows that the company does an
outstanding job at utilizing its assets to make money. For every $1 they possess in assets, they
can produce $0.055 in profits. As for the company’s return on equity, VZ is sitting at a healthy
71.6 % for the year. This percentage is positive when relating to the industry average of 8.5%.
The ratio shows that Verizon does a better job than the industry, regarding generating their
shareholders profit. (Ratios v Industry) As for the company’s market value ratios, Verizon
looks healthy when we look at the company’s P/E. The company sits at a price to earnings
ratio of 18.47%, which is high compared to the industry. With that being said, their PEG ratio
is more promising due to the company’s steady growth rate. This ratio sits at 1.69 when
looking into the next 12 months. Lastly, analyzing the company’s market to book ratio, VZ is
high compared to the market with a ratio of 14.24x. The Telecommunications industry
currently sits at an average of 2.1x. With that being said, this statistic is not a deal breaker
regarding Verizon. Although the price to book ratio insinuates the stock is overpriced
compared to the industry average, it is not a threat to the performance of the stock.

VERIZON (VZ)
Sector & Industry Information
SECTOR
We predict that the Telecommunication sector will continue its slow growth over the course of
the next year. The U.S. Telecom sector is an extremely competitive space where success is
dependent on a company’s ability to be technically superior, have quality service and allow for
scalability. The industry provides necessary utilities for both urban and rural areas, and in
turn, the companies within it experience slow but steady growth. This year the
Telecommunications sector is expecting a modest earnings growth rate of 7%. As for sector
risks, the most apparent is the threat of additional regulation by the FCC. The FCC frequently
adds new laws and bans that could negatively impact the industry's ability to obtain profit.
TREND
Verizon identified five key trends that would contribute to driving change within enterprises
and governments within the year of 2015. Verizon identified these trends and aggressively
provided goods and services that would fulfill these needs within the year. The five key trends
are as follows.
1. Network Reliability
2. Adoption Gains Momentum Downstream
3. Predictive Analytics Will Make Sense of Big Data
4. IT Will Direct the Cloud
5. Cybercrime
DEGREE OF COMPETITION
Verizon states within its 10-K that the telecom industry that they operate in is highly
competitive. Verizon directly competes with other national wireless service providers,
including AT&T, Sprint Corporation, and T-Mobile USA, as well as various regional wireless

VERIZON (VZ)
service providers. They also compete with technology companies such as Microsoft, Google,
and Apple who offer alternative means of voice and video calling. With this being said,
Verizon Communications has done a fantastic job in securing one of the largest chunks of
market cap totaling $187.41 billion. This market cap is second best to AT&T, which possess a
whopping $210.83 billion. (Exhibit 2) Verizon Communications has boiled down the most
important competitive factors of their industry down to five points. The first point regards the
importance of network reliability, coverage, and capacity. Verizon fills this critical
requirement by providing their 4G LTE network service. The second point is pricing, and
Verizon fulfills this need by providing the best value for price products and services to their
customers. The third factor concerns the importance of customer service. Verizon believes
that they provide a high-quality customer service experience that allows them to retain
customers and attract new ones. They also offer a variety of discounts and promotions such as
their “Smart Rewards” program. The fourth critical factor is product and service development.
VZ continues to pursue the development and rapid deployment of new and innovative wireless
goods and services. The fifth and final key competitive factor emphasizes the importance of
having complete sales and distribution strategies. The company says that they achieve sales
success within the wireless industry by reaching quality sales channels and distribution points.
(Exhibit 2)

VERIZON (VZ)
Risk & Reward
RISK
Although Verizon Communications is almost the perfect stock for a value company within the
Telecommunications sector of our portfolio, there is no such thing as risk-free. Through the
analysis of VZ’s 2015 annual report, it can bee seen that the most obvious risk that the
company faces concerns being at the will of the U.S. and international economy. All firms are
at risk of adverse impacts from unfavorable economic conditions such as a recession. As we
stated earlier in this report, there is a positive outlook on the economy as a whole and a neutral
weighting for the Telecommunications industry. We see this risk as being minimal within the
upcoming months and should not alter our investment decision. The second most prominent
risk derives from the degree of competition within the Telecom industry. Verizon recognizes
that their competitors are dominant firms that can fulfill the needs of the same customer base.
It is up to Verizon to follow the five key competitive factors to continue to gain market share.
This is a significant risk, but I don’t see it manifesting itself and reducing the revenue of
Verizon within the near future. From my perspective, the most imminent risk for VZ’s
performance comes from the possibility of government regulations and litigation from the
FCC. Verizon earns the majority of its revenue domestically, and these practices are subject to
regulation by the FCC. On the other hand, their foreign operations are regulated by a
multitude of foreign governments and international bodies. These entities frequently restrict
and impose conditions that in some cases hinder Verizon’s ability to operate. The barrage of
restrictions cause Verizon to spend a lot of money on litigation and adapting to these added
conditions. If the “perfect storm” of regulations were to hit Verizon at the wrong time, it could
affect their ability to achieve profit. All of these variables leave Verizon susceptible to a
possible decrease in revenue, but for the time being, VZ is in good shape. It is important for
an investor to scope out all risks associated with an investment, but in this case, the rewards
outweigh the risk.
REWARD
The information shows that Verizon will continue to be the ideal value stock for our
Telecommunications portfolio. Throughout the years, this company has powered through a
multitude of obstacles and been able to continue to create and provide innovative technology
and services. Verizon is well known for its high-quality service and a more than affordable
price. They have been able to provide these services and products without cutting corners like
some of their competitors. Competitors such as Comcast are notorious for having the worst
customer service within the industry, while Verizon ranked first in J.D. Power’s Customer
Rankings in 2012. This emphasis on people and innovation should lead to continuous future
growth within the foreseeable future.

VERIZON (VZ)
Due to the increasingly volatile market, it imperative to hold a stock like Verizon within the
portfolio. Within the past few weeks, there has been an onslaught of terror attacks and
threatening external forces. These tragedies and the increased presence of terrorist groups will
lead to increasing volatility in the world economy. It's hard to say how this will affect stock
prices, so it is important to have a steady inflow of cash. Verizon’s 5.1% dividend will provide
the portfolio with a safety net and a predictable cash flow going into the future.
Verizon has been trimming some of their lower margin operations and in the process providing
their balance sheet with a hefty boost. As of this week, all of the necessary regulatory
approvals have been passed for Verizon to sell their broadband, video, and wireline operations
in California, Florida, and Texas. Frontier Communications agreed to pay Verizon $10.54
billion for the three state arrangement, and the deal is expected to close in March of 2016.
Because this deal focuses on the improvement of service in largely rural areas, it will save VZ
a lot of time and money. This strategy is lower margin compared to the majority of their other
operations (fewer customers in a larger area). This will allow Verizon to put more focus on
their higher margin segments, while receiving a $10.54 billion cash boost to their balance
sheet.
With all of these positive moves, it is no surprise that there has been a positive impact on the
company’s financial statements as well. Regarding the company’s net growth, Verizon has
been able to significantly outperform the S&P 500 and the Diversified Telecommunications
Industry. The net income increased 9.3% compared to the same quarter a year ago, going from
$3,695.00 million to $4,038.00 million. With this growth, VZ has also managed to increase
their net operating cash flow by 13.97%.
Verizon is always looking for ways to improve their business functions, and they have found
that acquisition can be an extremely profitable strategy. Their newest possible venture comes
from the possibility of buying Yahoo. Verizon CFO Fran Shammo publicly stated that they are
considering acquiring Yahoo’s core business. With this news came a positive response from
the market with an increase in stock price by .88%. With this decision, the results can
materialize themselves positively within a further increase of the company’s net income,
revenue growth, EPS, cash flow from operations, and expanding profit margins. With this
being said, it is also important to keep in mind that VZ has high debt, and this deal could
impact their financial leverage.

VERIZON (VZ)
Summary
In conclusion, we recommend a hold for Verizon Communications Inc. as a value company
within the Telecommunications sector. Through careful analysis and projections of economic
conditions, industry trends, business models, financial analysis, timing, risks, rewards, and
competition, we see continuous performance for the company within the next couple of years.
The company is the ideal candidate for this aspect of the portfolio and has provided an
unmatched dividend every quarter. In building my financial model for Verizon, I created three
possible scenarios that coincided with next year’s growth. When looking at the Bear outcome,
VZ is only able to achieve 3% sales growth. This worst case scenario results in the target price
to sit at an unimpressive $42.69. As for the Neutral growth scenario, Verizon achieves an
expected 4% sales growth in the next year. This 4% translates to the target price increase to
$56.22. Lastly, the Bull outcome (best case scenario) shows an enormous bump in target price
due to the 5% sales growth rate. The target price jumps to $ 70.06, which would provide us
with massive capital gains to the portfolio (Model Outcomes). When all of the variables are
taken into mind, we are expecting a neutral scenario to be likely.

VERIZON (VZ)
Model Outcomes
BULL

VERIZON (VZ)
Ratio’s and Financial Statements
RATIO V. INDUSTRY

VERIZON (VZ)
BALANCE SHEET

VZ Financial Report

Recommended

Recommended

More Related Content

Similar to VZ Financial Report

Similar to VZ Financial Report (20)

VZ Financial Report