Earnings Recap

Verizon reported their Q4 earnings on January 23rd and it was a mixed bag at first.

Verizon (NYSE:VZ): Q4 EPS of $0.86 misses by $0.02.

Revenue of $33.96B (+5.0% Y/Y) beats by $700M.

Top line miss / bottom line beat.  Hard to expect much growth from a big telecom, right?  Short answer, no.

Earnings Continued

On an adjusted basis, the $0.86 was the same this year as last.  Meh to say the least.  Yes the company pays a nice dividend but growth is essentially non-existant.

Ok so then for the full year (adjusted again), Verizon managed to earn $3.74 in 2017 versus $3.87 in 2016.  Not good, moving backwards.  Clearly there is some work to be done with earnings declining.  In fact this is the second year in a row earnings have moved backwards.

(I like to use adjusted earnings as they tend to encapsulate the operating results and back out a lot of the adjustments companies make like acquisitions, divestitures, tax hits, things of that nature.  That “backing out” also cuts both ways, I’ve seen companies “back out” things that are good like big one time cash infusions.)

Tax Reform

The story that is being talked about but not fully understood is the tax reform that was passed in December.  Verizon is poised to benefit greatly under the plan.  Here are some notes taken from CEO Lowell McAdam on the conference call.

Tax-reform legislation will have a positive impact to cash flow from operations in 2018 of approximately $3.5 billion to $4 billion. The incremental cash flow will be used primarily to strengthen Verizon’s balance sheet.

Hang on, that’s a good chunk of change but Verizon is huge right?  Also taken from the call to put that amount in perspective:

Cash flow from operations totaled $25.3 billion in 2017, and capital expenditures totaled $17.2 billion. In 2017, Verizon made $9.5 billion in cash dividend payments to shareholders.

That cash flow expected from tax reform represents about a 16% boost in cash in 2018 if nothing else changed at all.

I also want to point out here that Verizon is actually overspending their operations.  The $17.2B in expenditures + the $9.5B dividend payment > $25.3B generated.  That is not good nor sustainable so they actually need this cash or to cut expenditures or the dividend.

2018 Expectations

Taken from the conference call, here are the important points going forwardin 2018.

  • Full-year consolidated revenues will grow at low-single-digit percentage rates on a GAAP basis.
  • Low single-digit percentage growth in adjusted EPS
  • Capital spending for 2018 will be in the range of $17.0 billion to $17.8 billion, including the commercial launch of 5G.
  • The expected savings from tax reform will generate a net $3.5 billion to $4.0 billion uplift to cash flow from operations in 2018. This is expected to yield a 55 to 65 cent increase in 2018 EPS.

The first two points are related, basically don’t expect much in terms of organic growth.  Capitual expenditures are expected to be the same as 2017 so that previous figure about cash spend isn’t getting better on it’s own.  The last point is the growth kicker I’ve been highlighting from the tax reform adding cash back onto the balance sheet.  For a company not even earnings $4 a share, adding $0.55 to $0.65 is a big boost and the prime reason this stock may pop in 2018.

Conclusion

Prior to diving into these results I had actually had a limit sell order in place.  I wouldn’t say things are great over at Verizon with anemic growth expected and a dividend that is being paid partially with debt.

Then why even both writing about a company just keeping the lights on?  I’ll answer that with a picture and then dive into it.  Look at the yellow highlight about the large jump in earnings expected in 2018.

The blue line is the average P/E ratio over the 12 year period I’m looking at.  Basically you can see how the stock price meanders around it over time.   The point here is that Verizon may have some room to run here.  If these earning expectations come true then the stock is only trading at 12x earnings right now.  This could make a run up in the high $60s and maintain it’s same historical P/E ratio.

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