Is Verizon Overvalued?

Posted Jan 27th 2011 3:30PM by Joseph Lazzaro
Filed under: Verizon Communications (VZ), Stocks to Buy

Verizon Communications (VZ), first discussed here on February 12, 2009, at a price of $29.86, has pushed through $30 resistance with room to spare, and one could make the argument that VZ is overvalued at this stage.

But that's not the argument favored here.

Look for slow growth/dividend play Verizon to post a 2% to 2.5% revenue gain in 2011, after flatish revenue in 2010, with data services being the key revenue increase driver. Meanwhile, Verizon's landline business continues to provide revenue stability.

Verizon's cell phone subscriber additions should lead the sector, but competition may hurt overall subscription prices. The much-sought addition of Apple's (AAPL) iPhone smartphone will provide a subscriber tailwind.

Further, if unlimited service for a flat fee becomes the sector norm, that would further dent wireless revenue. As of June 2010, Verizon had 93 million wireless subscribers, with another 8 million devices connected to its network. A rock-solid $1.95 annual dividend -- good for a cool 5.6% yield at the current stock price of about $36 -- adds to the positive mix.

The Thomson Reuters First Call FY2011/FY2012 EPS estimates for VZ are $2.21 to $2.60.

Technically, there is the danger of a short-term double-top near $38 with VZ, but the calculation here is that the uptrend is stronger and should prevail.

2011 Outlook: I view Verizon as a long-term play, but if you're looking to sell VZ within the year, it's probably best to take your profits after it rises to $43 to $46, if it fails to rise above $47.

Stock Analysis: I consider Verizon Communications to be a moderate-risk stock. If an investor has already purchased the company's shares, I'd hold them. If not, I'd consider buying a 25% position in VZ now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, I wouldn't buy more than 75% of my VZ position before March 2011, and I'd put a sell/stop loss at $18.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.