What Will Verizon Do Post Earnings?

With shares of Verizon (NYSE:VZ) trading around $46, is VZ an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Verizon is a provider of communications, information, and entertainment products and services to consumers, businesses, and governmental agencies. It operates in two primary segments: Verizon Communications and Wireline. Verizon Communications’ products and services include wireless voice, data services, and equipment sales, which are provided to consumer, business, and government customers across the United States. Wireline’s products and services include voice, Internet access, broadband video and data, Internet protocol network services, network access, long distance, and other services.

Verizon Communications today reported its fifth consecutive quarter of double-digit percentage growth in operating income and earnings per share. First-quarter 2014 results included the impact of February’s close of the $130 billion transaction to acquire full ownership of Verizon Wireless. Lowell McAdam, Verizon chairman and CEO, said: “Verizon has delivered double-digit earnings growth in eight of the past nine quarters, and in first-quarter 2014 we posted our strongest consolidated revenue growth in five quarters. With the wireless transaction now behind us, we have great confidence in our ability to sustain these strong results.

“We are already seeing the expected earnings accretion from the transaction,” McAdam added. “The full access we now have to the significant cash flows of Verizon Wireless is energizing our efforts to provide customers with product and service innovations and to enable powerful solutions to some of the world’s biggest challenges.”

Verizon reported $1.15 in EPS in first-quarter 2014, compared with 68 cents per share in first-quarter 2013. First-quarter 2014 results included an after-tax gain of approximately $1.9 billion (55 cents per share) related to the sale of Verizon’s minority interest in Vodafone Omnitel as part of the wireless transaction, and charges of $575 million (17 cents per share) related to debt redemption and $260 million (8 cents per share) in interest and financing costs related to the wireless transaction.

On an adjusted basis (non-GAAP), Verizon reported EPS of 84 cents in first-quarter 2014, compared with 68 cents per share in first-quarter 2013 – an increase of 23.5 percent. With the transaction to acquire full ownership of Verizon Wireless closing on Feb. 21, Verizon’s first-quarter 2014 results only include five weeks of the full results of Verizon Wireless. On a non-GAAP, illustrative basis, adjusted EPS of 84 cents would have been 91 cents per share assuming 100 percent ownership of Verizon Wireless and all shares issued in the transaction were outstanding for the full quarter.

T = Technicals on the Stock Chart are Mixed

Verizon stock has struggled to make significant progress over the last couple of years. The stock is currently pulling back and may need time to consolidate before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Verizon is trading between its rising key averages which signal neutral price action in the near-term.

VZ

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Verizon options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Verizon options

16.39%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Verizon’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Verizon look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

69.12%

18.92%

39.29%

14.06%

Revenue Growth (Y-O-Y)

4.75%

3.67%

4.39%

4.32%

Earnings Reaction

-2.53%*

-0.77%

3.49%

-1.51%

Verizon has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Verizon’s recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has Verizon stock done relative to its peers, AT&T (NYSE:T), T-Mobile (NASDAQ:TMUS), Sprint (NYSE:S), and sector?

Verizon

AT&T

T-Mobile

Sprint

Sector

Year-to-Date Return

-5.93%

-1.41%

-11.90%

-23.90%

-9.78%

Verizon has been a relative performance leader, year-to-date.

Conclusion

Verizon provides communications products and services through a variety of mediums to consumers and companies around the world. The company on Thursday reported first quarter earnings that left investors pleased. The stock has struggled to make significant progress and is currently pulling back. Over the last four quarters, earnings and revenues have been increasing. Relative to its peers and sector, Verizon has been a year-to-date performance leader. Look for Verizon to OUTPERFORM.

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