With Valuation Priced In, Morgan Stanley Downgrades Verizon

Verizon Communications Inc. VZ has gained 11 percent in 2018 and outperformed the S&P 500 index by 12.6 percent and rival AT&T Inc. T by 35 percent, according to Morgan Stanley.

The Analyst

Morgan Stanley's Simon Flannery downgraded Verizon from Overweight to Equal-Weight with an unchanged $58 price target.

The Thesis

Shares of Verizon continue to trade near Morgan Stanley's $58 price target and there are three reasons investors shouldn't expect any additional upside.

• Verizon's stock is now trading at a 114 basis point spread to the U.S. 10-year and a 271 basis point premium spread to AT&T, which is more than 3.5 times greater than the five-year average spread.
• Verizon continues to market itself as the first American carrier to offer 5G connections, but Flannery said this will come at a cost. Specifically, Verizon is projected to spend up to $18 billion on wireless spectrum over the coming three years. Markets tend to "react unfavorably" to any unexpected elevated spending on spectrum.
• The competitive environment in the mobile market could return to prior "aggressive levels" with rival T-Mobile Us Inc TMUS looking to compete with Verizon's 5G Home offering by delivering wireless broadband coverage to 66 percent of the U.S. population by 2021 and 90 percent by 2024. The pending Sprint Corp S merger with T-Mobile could mark a return to "ARPU (average revenuer per user) deflationary tactics of years past."

Price Action

Shares of Verizon were trading lower by 2.2 percent at $57.55 Wednesday afternoon.

Related Links:

Verizon's Voluntary Layoffs: What You Need To Know

The Telecom Sector: JPMorgan Downgrades Verizon, Upgrades AT&T

Photo credit: Anthony92931 (Own work) via Wikimedia Commons