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Stock Analyst Update

Things Looking Up for Verizon in 2018

We expect continued margin expansion, and have increased our fair value estimate on the narrow-moat firm.

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 Verizon (VZ) reported much-improved fourth-quarter results, and we are increasing our fair value estimate to $52 per share from $50. We retain our narrow moat rating and view the shares as fairly valued. The firm reported year-over-year revenue growth of 5% for the quarter, which allowed full-year revenue to be flat versus our estimate of a 1.4% decline. However, much of the revenue growth was due to acquisitions. On an organic basis, revenue fell about 2% for the year. Verizon added 1.2 million retail postpaid customers in the quarter, and 2.1 million for the full year, its best result in a couple of years. This is the first quarter in about four years that anyone has added postpaid subscribers at a similar rate to T-Mobile U.S., which we see as a good sign for improvement in 2018.

The firm also expanded its Fios business by 2.3%, which was sufficient to generate a slight gain in total fixed-line revenue. While we haven’t been too excited about Verizon’s acquisitions of AOL and Yahoo, the media business, which includes these acquisitions, grew 10% sequentially as advertising revenue increased during the holidays. However, we believe this rate of growth was holiday-specific and not sustainable in the long term.

Verizon also did a nice job of controlling costs and boosted its EBITDA margin to 35.2% for the full year versus our projection of 34.7%. Management has discussed the removal of $10 billion in costs over the next four years, but we expect some of these savings will go toward marketing and retention efforts. That said, we anticipate continued margin expansion. We previously reduced our tax-rate expectation for 2018 to 24.5%, in line with management’s guidance for 2018, but we are now modeling a tax rate of 21% starting in 2019. We anticipate higher capital expenditures as the firm rolls out 5G and more fiber in order to control more of its own backhaul needs, which partially offsets our expectations for higher 2018 revenue, better margins, and lower taxes.

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Allan C. Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.