So far in 2016, Verizon Communications Inc. (NYSE: VZ) has been the top performing Dow stock, posting a gain of roughly 18% year to date. Despite this gain, one key analyst sees this stock taking somewhat of a backseat for the rest of the year.
Jefferies is downgrading Verizon to a Hold rating but maintaining a $53 price target, citing elusive growth and strategic uncertainty.
Although Verizon has set the expectation that 50% penetration of unsubsidized rate plans should help stabilize ARPA declines, Jefferies sees a risk of continued pressures throughout the first half of 2016. In the firm’s view, earnings per share (EPS) growth will remain elusive over the next two to three years.
Verizon has clearly been attacking the urban MDU marketplace with FiOS, manifesting itself in significant broadband net add outperformance versus video. Jefferies asks whether the long-term economics for FiOS video will be challenged without gaining more scale. Considering the pressures related to content costs, and the meaningful network investment for video delivery, the firm wonders whether FiOS video becomes a margin headwind as scale diminishes. The uncertainty surrounding these questions are partially the catalyst for this downgrade.
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Jefferies detailed in its report:
Given the timing of the deal close, the sale should represent an $0.06 headwind to 2016 EPS. Guidance for EPS to “plateau” in 2016 embeds the divestiture and assumes the impact can be mitigated through operational efficiencies at the consolidated company. The ability to further reduce costs to offset the lost EBITDA represents the most significant threat to guidance and consensus in our view, with management needing to remove $375 million in costs to ensure the transaction is EPS neutral.
Shares of Verizon were last seen down 2.8% at $52.04 on Thursday, with a consensus analyst price target of $51.70 and a 52-week trading range of $38.06 to $54.49.
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