Verizon Stock Is On a Tear, but Is It Time to Sell?

Verizon stock is up 21% in 2016, as investors have bid up the stock while searching for safety and yield. Is it now time to hang up on Verizon?
By Chris Laudani ,

Verizon (VZ) - Get Report is scheduled to report second-quarter fiscal 2016 results on July 26, and it seems investors have driven the share price up in a desperate search for safety and yield.

The consensus estimate for the quarter is 95 cents in earnings per share and $31.09 billion in revenue.

The first quarter was in line with estimates. Verizon reported earnings of $1.06. Revenue rose 0.6% to $32.17 billion vs. the Street estimate of $32.48 billion. Excluding AOL, which was not part of Verizon last year, revenue declined 1.5%.

Verizon Wireless reported 640,000 postpaid net additions and ended the quarter with 112.6 million retail connections, a 3.7% increase over last year. Churn was 0.96%, an improvement of 7 basis points over last year. Wireless revenue was $22 billion, a decline of 1.5% as more customers chose unsubsidized device payment plans.

The percentage of phone activations on installment plans rose to 68%. Management expects this number to rise to 70% by the second quarter. Approximately 48% of customers are on an unsubsidized plan and service revenues are expected to flatten out when this number exceeds 50%.

Verizon ended the quarter with almost 74 million smartphones on its network. And 85% of the total phone base is using a 4G device. Verizon added 98,000 FiOS Internet customers and 36,000 new video connections in the quarter. Total FiOS revenue grew 5% to $3.5 billion.

Management reaffirmed its previous fiscal 2016 guidance of $3.99 per share, flat with last year. Revenue of approximately $128 billion is expected to be down about 2.8%.

Revenue growth has been under pressure ever since Verizon allowed customers to use an unsubsidized phone on its network. As a result, revenue will decline this year and will likely turn higher next year as these changes in the way customers pay for their phones are absorbed into Verizon's operating model.

Despite sluggish revenue and flat earnings, investors have bid up shares of Verizon as they have searched for safety and dividend yield. In periods of uncertainty, Verizon is a high quality name in which to hide.

Valuation-wise, Verizon is trading at a 14 times this year's estimate and 13.6 times next years estimate of $4.03 per share. Historically speaking, 13 to 14 times is a valuation high for shares of Verizon. Unless there is more economic uncertainty, its unlikely Verizon's valuation will continue to expand beyond $55 per share.

After the run the stock has had, I would not commit fresh capital to the stock. It looks like time to hang up on shares of Verizon.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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