Introduction
Verizon Communications Inc., more commonly known as Verizon, is an American telecommunications and media giant. It is one of the largest wireless and landline services providers in the United States and one of the world’s largest providers of Internet services. The company is headquartered in New York City and is a part of the Dow Jones Industrial Average. The company’s formation and growth were influenced by the merger of two long-time telecommunications giants, GTE and Bell Atlantic. Verizon offers telecommunication services to residential and business customers, including wireless, landline, high-speed Internet, fiber optics, and television (Bryja, 2022). The company also offers a variety of products, such as mobile phones and tablets, home phone services, and home security systems.
Verizon is a crucial company to analyze because it is a bellwether for the telecommunications industry. As one of the largest providers of telecommunications services in the United States, Verizon’s performance and strategies are closely watched and often serve as a model for other providers. The company’s performance and strategies also influence the direction of the telecommunications industry as a whole. For example, in 2019, Verizon launched 5G services in some U.S. cities. Other significant providers closely watched this move, followed suit, and launched their 5G services.
Similarly, Verizon’s move to increase data speeds and expand its fiber-optic services shaped the telecommunication industry in the U.S.A. and globally as other firms followed suit. In this regard, Verizon Communication Inc’s market base, large customer share, and wide range of services make it an attractive target for investors. Against the backdrop of this information, this paper employs different financial analysis tools to delve into and understand the financial performance of Verizon Communications and its industry position.
Financial management and Valuation tools.
Financial management and valuation tools are essential to assess a company’s value and guide decision-making processes. With them, it is easier to identify the potential value of a company, its financial health, and the potential return on investment. To this end, this paper has employed the following financial management tools to measure and understand the financial performance of Verizon Communication company.
- Capital asset pricing model (CAPM): This model determines the required rate of return of a potential investment. The CAPM considers the risk of the potential investment and the market’s rate of return as a whole. The model determines the expected return on a potential investment and assesses the potential return on investment. This model will be critical in calculating Verizon Communication Inc’s equity cost.
- Weighted Average Cost of Capital (WACC): Weighted Average Cost of Capital (WACC) is a financial metric used to measure the cost of capital employed by a company to finance its operations. It is the average cost of equity and debt, weighted by their respective proportions. It is an essential tool in company valuation and helps investors and analysts make decisions regarding the optimal capital structure of a company. The cost of equity is the rate of return expected by the equity investors of a company. It is usually estimated using the Capital Asset Pricing Model (CAPM), which considers the risk-free rate, beta (a measure of the company’s volatility relative to the market), and the expected return of the market. The cost of debt is the cost of borrowed capital, the interest rate paid on debt. It is usually estimated by looking at the company’s debt rating and the interest rate of similar companies. The results of WACC computation will be significant in carrying out the discounted cash flow analysis of the Verizon Communication company, which will be the hallmark of evaluating the company’s enterprise value.
- Price Earning Ratio: This ratio compares the market price of a company’s stock to its earnings per share. The higher the P/E ratio, the more expensive the stock is relative to its earnings. The P/E ratio can assess the market’s perception of a company’s financial health and the potential return on investment.
- Discounted Cash flow: This model estimates the value of a company’s stock by discounting the future dividends that the company is expected to pay its shareholders. (Cornell and Gerger,2022). The model considers the expected growth rate of the company’s dividends and a potential investor’s required rate of return.
- Enterprise Value: This metric is used to assess the value of a company as a whole. The E.V. considers a company’s assets and liabilities, including debt and equity. The E.V.E. can be used to assess the potential return on investment and compare the value of Verizon Communication company to the industry benchmarks.
Verizon Communication Inc. risk profile analysis.
Risk profile analysis is a process of evaluating the financial risk of the company in order to make informed decisions about investing or other financial activities. This process involves collecting and analyzing data about the company’s financial history and current financial standing to identify potential risk areas. The analysis results are then used to identify strategies for mitigating these risks and assess the potential return on investment.
Understanding the risk profile of Verizon Communications is an integral part of evaluating the company’s performance. This section of the analysis focuses on the company’s current industry position and ability to manage risk.
Verizon’s risk profile is complex due to its large size and the many services offered. It is exposed to various risks related to its operations, financials, and competitive environment. The company’s risk profile is shaped by its capital structure, composed of debt, equity, and other financing instruments. The company’s current capital structure shows it has more debt capital than equity, with its total long-term debt of $ 237.046 billion. The company’s long-term debt consists of bonds and capital leases. Verizon Communications Company issues bonds rated by rating agencies such as Moody’s, Standard & Poor’s, and Fitch. Bond ratings are used to give investors an indication of the issuer’s creditworthiness and to compare the relative risk of different bonds. The ratings range from A.A.A. (the highest quality) to D (in default). Verizon Communications Company has recently been assigned an investment grade rating of Baa2 from Moody’s, BBB+ from Standard & Poor’s, and B.B.B. from Fitch. Bonds Bonds rated Baa2, BBB+, and B.B.B. are considered investment grade quality, providing a moderate risk to investors (Matta, 2022); for instance, to calculate the WACC of the company, I have chosen the yield to maturity of Verizon’s bond which will mature in 2052. This bond and many other bonds of the company have been rated B.B.B. by the rating agencies.
Debt financing and other liabilities become risky to the company when it cannot meet that obligation with either free cash flow or it becomes expensive to raise additional capital. The 2022 balance sheet of Verizon Communication shows that the company had short-term liabilities of $ 50.17 billion and long-term debt of $ 237.046 billion. Offsetting this, the company had 2.605 billion in cash and $ 24.506 billion in receivables. As such, the cash and cash equivalents of the company fall short of the total liabilities with $ 260.105 billion against them. With the current market capitalization of $ 164.77 billion, the total debt position of the company raises a significant concern and increases its risky profile in the industry. However, to understand the company’s cost of finance, its important to determine its weighted average cost of capital. As a result, the WACC of Verizon Communication based on the calculation provided in the accompanying Excel file is 4%. This ratio was obtained by calculating the relative weight of debt and equity in the company’s capital structure. Based on the current market capitalization of $ 164.72 billion and the long-term debt of $ 237.046 billion, Verizon’s debt- equity mix is 0.59: 0.41. This shows that Verizon has more debt than equity. Besides, to complete the WACC computation, I determined the company’s beta. Beta measures a stock’s volatility about the overall market. It is a measure of systematic risk and is used to calculate a company’s equity cost. Beta is a critical component of the Capital Asset Pricing Model (CAPM), which determines the expected return of security given its level of systematic risk. This metric is essential in determining the cost of equity because it helps investors understand how much risk they are taking on by investing in a particular stock (Fernandez,2019).
To determine Verizon’s beta, I ran the regression of the monthly return on the company’s stock for the period January 2022 to April 2023. This return was compared against the S&P500 over the same period. The resultant regression output provided 0.29 as Verizon’s beta. Using these values together with the firm’s cost of debt, the WACC of the company is 4.%. The results of Verizon’s WACC and beta show that despite its debt position, the company is less volatile and can access capital at a lower cost. Accessing capital at a lower cost gives Verizon Communications a competitive advantage in the telecommunication industry, which is more capital-intensive. The dynamics in the industry require a huge investment in research and innovation. As such, the company’s sustainability in the industry is influenced by, among other factors, the ability to access funds for technological requirements.
Discounted Cashflow Analysis
Discounted Cash Flow Analysis (D.C.F.) is a financial tool used to make decisions about long-term investments. It works by discounting the future cash flows of a project or investment back to the present value, taking into account the time value of money and the level of risk associated with the investment. D.C.F. analysis is an important tool for financial management because it allows decision-makers to make more informed decisions about where to allocate resources and how to maximize the return on their investments (Cornell & Gerger, 2022). The basic premise of D.C.F. analysis is that the future cash flows of an investment should be discounted back to the present value, taking into account the time value of money and the risk associated with the investment. The discount rate used in the analysis is typically based on the expected rate of return on the investment and reflects the risk associated with the investment. The higher the discount rate, the lower the present value of the future cash flows and the more conservative the investment decision. D.C.F. analysis aims to identify investments that provide the best value for the money invested. By taking into account both the future cash flows of the investment and the risk associated with the investment, the decision maker can make an informed decision about which investments are most likely to provide the highest return on investment.
The D.C.F. analysis of Verizon Communication Inc started with forecasting a company’s future cash flows using assumptions based on historical financial data. This is done by estimating the company’s revenue growth rate, cost of goods sold, operating expenses, and capital expenditure. The assumptions used in this analysis were based on the financial data for the fiscal years 2020, 2021, and 2022. The company’s revenue is important in the discounted cash flow analysis as it provides the foundation upon which other components in the analysis are derived.
EBITDA, EBIT, and N.O.P.A.T.
The determination of EBITDA, EBIT, and N.O.P.A.T. is derived from the revenue after making the necessary adjustment. The revenue of Verizon increa128.29billion in 2020 to $ 136.83 billion in 2023. Therefore, the projected revenue in our discounted cash flow analysis is based on the assumption that the company’s revenue will grow in the future. Our model has estimated revenue growth from 2023 to 2026. Based on the analysis, the company’s revenue is projected to be $ 154.22 billion in 2026. Besides, the EBITDA and EBIT of the company changed slightly in the analysis increasing and decreasing depending on the expenses of the respective year. For instance, in 2022, the EBITDA and EBIT of the company were $ 34.21 billion and $ 15.43 billion, respectively (Yahoo Finance, 2022). This was against the higher values of $ 45.52bilion and $ 28.79bilion reported in 2020. The analysis further revealed that the N.O.P.A.T. of the company, which represents earnings after tax, changed from $ 18.71 billion in 2020 to $ 19.8bilion in 2022.
Another important component in Verizon’s discounted cash flow analysis is capital expenditure. This represents the changes in the company’s property plant and equipment value. The model shows that the CapEx. The company changed from $ 19.63 billion in 2020 to $ 24.83 billion in 2023. This had a net effect of reducing the company’s free cash flow as it spent more cash on the purchase of fixed assets. The discounted cash flow analysis also determines the net change in working capital. The company’s working capital is critical as it determines the amount of net cash and cash equivalent used to finance recurrent or daily operations (Boisjoly et al.,2020). The high the working capital available, the more liquid the company. Therefore, the net change in working capital in our model focused on the company’s current assets and current liabilities. The net- working capital change of Verizon Communication was $ 14.93 billion in 2020 and increased in 2022 because the company’s current liabilities were more than its current assets. To determine the free cash of the company’s Capex and the net change in working capital is subtracted from the sum of N.O.P.A.T. plus the depreciation and amortization. Depreciation and amortization are added back to the N.O.P.A.T. because it’s not a cash expense and therefore does not represents a cash outflow.
Discounting the free cash flows
To complete the discounted cash flow analysis, it is imperative to determine the appropriate discounting rate. However, the free cash flows are discounted we determined the terminal value.
Terminal value is the estimated value of a business beyond the explicit forecast period in a discounted cash flow analysis. It is important because it allows investors to estimate the value of a project past the explicit forecast period, which can be more than ten years in the future. Terminal value is calculated by taking the present value of the expected cash flows beyond the explicit forecast period and discounting it back to the present value (Brigham & Houston, 2021). The terminal value is often the single largest component of the value of a business and is significant in determining the total value. In this case, the discounting rate used in this analysis is the computed weighted average cost of capital of Verizon Communication. According to the WACC computation, the company’s weighted average cost of capital is 4%; therefore, the company’s free cash flow has been discounted using the present value interest factors at 4%. The computed result provided the discounted cash flow in our model’s three years of actual data and the three years of projected free cash flows.
Enterprise Value and Price earnings ratio.
The hallmark of our discounted cash flow analysis is to determine the enterprise value of Verizon Communication Company. Enterprise value (E.V.E.V.) measures a company’s total value, often used as a more comprehensive alternative to equity market capitalization. E.V.E.V. calculates a company’s market capitalization, debt, preferred shares, and other non-equity liabilities. It measures a company’s value to all its stakeholders, including equity and debt holders. In this regard, the enterprise value of Verizon Communication provided in the Excel file represents the sum of the discounted cashflow of the company (Palepu et al.,2020). The Enterprise Value of Verizon Company shows that the company is a high value and a key player in the industry with a higher cash flow and revenues than the competitors.
Additionally, the price-earning ratio is another important metric for understanding the competitiveness of Verizon Communication company and its industry position. The (P/E ratio) measures a company’s current share price relative to its per-share earnings. It is calculated by dividing the current closing price of the stock by the most recent reported earnings per share (EPS). The price-earnings ratio assesses whether a stock is overvalued or undervalued. A high P/E ratio indicates that investors are expecting higher earnings growth. A lower P/E ratio indicates that the stock is undervalued and could be a good investment. The PE of Verizon for 2021 and 2022 was 8.97 and 7.54, respectively, against the competitor’s T-Mobile ratio of 48.12 and 67.96 (Yahoo Finance, 2022). This result shows that T-Mobile’s stock is overvalued, and Verizon’s is undervalued. In this regard, more investors may be attracted to Verizon than to T-Mobile. However, it is important to understand that attractiveness may depend on other factors, such as an investor’s risk preference.
Conclusion
This analysis has provided an in-depth evaluation of Verizon Communication Company. The analysis has shown that despite the company’s more debt financing, it has a strong foot print in the telecommunication industry. The company can access financing at a lower cost of capital of 4%, as depicted by its WACC, representing its debt and equity mix. Besides, the company has a good risk profile according to its bond rating done by rating agencies such as Moody. More importantly, the discounted cash flow analysis has provided a more pertinent financial outlook by establishing the company’s current enterprise value.
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