EUR 850.00 For Business Accounts Only

Morningstar | VZ Updated Forecasts and Estimates from 28 Feb 2019

Verizon’s investor meeting held on Feb. 21 emphasized several familiar themes--the firm aims to lead the race to 5G, with fiber deployment a central piece of this effort, and it will reorganize the business around customer types rather than network function, changing the way it competes while also cutting costs. Verizon did seem to hedge its plan to reach 30 million households with fixed-wireless broadband service, reinforcing our view that the service will be confined to fairly narrow niche markets. Management also continues to hold the same capital allocation priorities, with business investment first, followed by the dividend, and then debt reduction. The firm introduced an explicit unsecured leverage target (1.75-2.00 times EBITDA) it believes (optimistically, in our view) will, once achieved, move its credit rating back up to the low-A range. The information presented doesn’t alter our narrow moat rating or $58 fair value estimate.

Given the centrality of Verizon’s network strength to its strategy, the focus on 5G certainly isn’t a surprise. The firm plans to launch 5G service in 30 markets during 2019, which it defines as wide network coverage, attractive device availability, and active marketing. Implied in this definition, management believes rival 5G launches will fall short of Verizon’s. For example, AT&T recently said it had introduced mobile 5G “in parts of” 12 cities. We expect Verizon’s network will continue to perform well relative to its competitors, but we don’t believe it is poised for a major leap ahead as it did in the transition to 4G LTE. The firm is relying heavily on very-high frequency millimeter wave spectrum for a large portion of its 5G effort, which we expect will deliver immense capacity in some locations but more modest benefits in most places. In short, we expect 5G will allow carriers to meet growing network demand and add incremental uses for the wireless network, but we don’t expect a revolution in the wireless business.

Verizon’s effort to build out fiber is an aspect of its network plans that we find interesting. The firm is actively building fiber in 60 markets outside of its traditional local-phone footprint, and it expects to have more than 25,000 route miles constructed by the end of 2019. For comparison, Crown Castle, one of the largest providers of metro fiber to the wireless industry, holds about 35,000 route miles in total. Verizon has often said that it is willing to lease or buy fiber in a given area if available, implying that it only builds fiber where it isn’t already available and suggesting that it builds where it can leverage existing assets. As such, we believe this effort could create a unique asset for Verizon that enhances its network performance or cost structure relative to rivals. That said, Verizon’s build is still relatively small when looking at U.S. network infrastructure broadly. Comcast, for example, claims to have 150,000 miles of fiber and 650,000 miles of total plant in its network, which primarily serves residential areas and covers less than half the country.

In terms of Verizon’s fixed-wireless effort, management commented that it could reach 30 million homes over 5-8 years, but that actually providing a hard number of homes reached depends the minimum speeds it chooses to offer. In other words, the network faces capacity limitations that limit marketability. The firm also provided little incremental data on how its initial test markets are performing. At the start of 2019, Verizon claimed that customers were receiving nearly 1 gigabit-per-second speeds (versus promised 300 megabits per second) using only 40% of the firm’s available millimeter wave spectrum. We’re surprised Verizon didn’t again tout the network’s performance. We continue to believe it will take some time to determine how well the service works as the networks load with traffic.