Analyst Says Verizon's Stock Should Move Higher On Improved Fundamentals

Multiple aspects of Verizon Communications Inc. VZ's business are showing signs of meaningful improvement and investors should now be buyers of the stock, according to Deutsche Bank.

The Analyst

Deutsche Bank's Matthew Niknam upgraded Verizon from Hold to Buy with an unchanged $56 price target.

The Thesis

Verizon's stock should now be bought by investors for three reasons, Niknam said in a note.

First, after several years of "aggressive competitive activity" industry pricing in the wireless industry has "moderated." The company's upcoming second quarter earnings report at the end of July should show a return to service revenue growth on a year-over-year basis for the first time since late 2014. This is notable for Verizon as nearly 90 percent of its entire EBITDA comes from the wireless business.

Second, Verizon could see "meaningful upside" from two key investments: 5G where it is investing aggressively to establish an early leadership position ahead of a planned 2018 launch, and digital advertising where its Oath business has a 4 percent market share in a $100 billion market.

Third, Verizon's stock looks attractive at just 10 times next year's earnings per share, which is a discount to its five-year average of 13 times and 10-year average of 14 times, the analyst said. The firm's $56 price target is based on a 12 times multiple on 2019E EPS, which implies a 23 percent upside potential when factoring in a 5 percent dividend yield.