On Thursday, KeyBanc Capital Markets downgraded Verizon Communications (NYSE:VZ) stock from Overweight to Sector Weight, citing multiple concerns about the company's future financial performance. The firm pointed to a predicted slowdown in EBITDA growth and free cash flow, as well as potential missteps in capital allocation.
Verizon's recent performance fell short of KeyBanc's expectations, prompting the reassessment of the stock's outlook. The firm projects a modest EBITDA growth of 1.5% in 2025, a decrease from the 2.2% anticipated for 2024. Additionally, free cash flow is expected to decline to $17.5 billion in 2025 from $20.2 billion in 2024.
The analyst also expressed reservations about Verizon's potential acquisition of FYBR, suggesting it could be a poor use of capital that may restrict the company's ability to repurchase shares. This acquisition is seen as a negative factor that could dampen a more optimistic scenario for the stock.
Another point of concern for KeyBanc is the deceleration in the improvement of Verizon's postpaid phone net additions, along with an increase in device subsidies. The firm believes that Verizon is spending more to achieve the same level of growth, which could impact profitability.
KeyBanc concluded that it would reconsider a more positive stance on Verizon's stock if there were a pullback in valuation or if the company's performance exceeded expectations. For now, the firm remains cautious and has adjusted its rating to reflect the less favorable outlook.
In other recent news, Verizon Communications reported a record EBITDA of $12.5 billion in their third-quarter earnings, marking a significant milestone for the company. The telecommunications giant also noted a 2.7% increase in wireless service revenue and a significant addition of 239,000 net postpaid subscribers. Scotiabank, however, reduced the stock's price target to $47.00 from the previous target of $47.25, maintaining a Sector Perform rating.
The adjustment came after Verizon's third-quarter earnings report showed steady revenue year-over-year at $33.3 billion, slightly below the $33.6 billion anticipated by Scotiabank. The flat revenue was attributed to reduced wireless equipment sales as customer upgrade volumes declined, counterbalanced by an increase in wireless service revenue.
Verizon's recent developments include a strategic focus on expanding its broadband reach, targeting over 100 million households with a blend of fixed wireless access and fiber solutions. The company also plans to double its fixed wireless access subscribers by 2028, with a current broadband customer base of 11.9 million.
However, Verizon's capital expenditures (capex) for the fiscal year 2025 increased by $750 million compared to the previous year, which was not anticipated by Scotiabank. This adjustment suggests that while free cash flow (FCF) levels are healthy, there might not be growth in FCF next year. Despite these factors, Scotiabank reaffirmed its Sector Perform rating on Verizon's shares.
InvestingPro Insights
Despite KeyBanc's downgrade, InvestingPro data reveals some positive aspects of Verizon's financial position. The company boasts a market capitalization of $180.42 billion and a P/E ratio of 11.44 (adjusted for the last twelve months as of Q3 2024), suggesting it may be undervalued compared to its peers. Additionally, Verizon's dividend yield stands at an attractive 6.32%, which aligns with an InvestingPro Tip highlighting that the company "pays a significant dividend to shareholders."
Another InvestingPro Tip notes that Verizon "has raised its dividend for 20 consecutive years," demonstrating a strong commitment to returning value to shareholders. This consistent dividend growth could be particularly appealing to income-focused investors, especially in light of KeyBanc's concerns about future cash flow.
While KeyBanc expresses caution about Verizon's future performance, it's worth noting that the company's revenue for the last twelve months as of Q3 2024 was $134.24 billion, with a gross profit margin of 60.01%. These figures suggest that Verizon maintains a strong market position and profitability, which may provide some reassurance to investors.
For those seeking a more comprehensive analysis, InvestingPro offers 10 additional tips on Verizon, providing a broader perspective on the company's financial health and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.