Verizon Intrinsic Price Evaluation

Made Possible by:Matthew Jackson and Martin Lamar

Finance 460May 1, 2023

Table of Contents

IntroductionVerizon Communications Inc. is the largest domestic telecom services in the country. It was

formed through the merger of Bell Atlantic Corp and GTE Corp. on June 30, 2000. The

company’s wireless company offers wireless voice and data services; messaging services.

Additionally, through this subsidiary they not also offer basic phones as well as smartphones

they offer business-focused multimedia offerings, global data services. The wireline segment of

Verizon offers high-speed internet, local exchange, regional and long distance calling with a host

of other services. Verizon Communications Inc. has a market cap of $204.02B, which makes it

the largest of the big four domestic telecommunication companies. AT&T Inc., Sprint

Corporation, and T-Mobile US, Inc. being the other three companies. It has a beta of 0.37 which

means it is a relative safe investment, do not expect a high degree of standard deviation. It has

revenue of over $128B which is only behind AT&T, its closest competitor, which had just above

$132B. It also has a higher EPS of $2.38 than any of the competitors in the sector.

Verizon is known to have the best service wireless service in the United States. We fill that this

strength in having the strongest mobile wireless network will last for the foreseeable future.

Verizon has just launched a new mobile streaming service to help offset the loss of subscribers

from its wireless network. Last quarter Verizon loss approximately 138,000 subscribers to Sprint

and T-Mobile through their price cutting deals. However, we fill that this is a small setback and

the company will bounce back from this.

Recently, Verizon just announced that they will be re-bundling their FiOS pay-tv package, which

is geared more to consumer preferences. Even though some companies namely ESPN which is

owned by Disney might have a problem with this new offer of pay-tv services we feel that this

will overall help the company remain strong in the future.

Historical Data Collection

Cash Flow MethodFor this method, we required two different financial statements, the Cash Flow Statement and

Balance Sheet. The Cash Flow Statement contains the net cash from investments, as well as the

Net Cash Flow from Operations. The data we got from these financial statements will go into our

spreadsheet. The data we need from the balance sheet is the net debt. After retrieving on the

information from these financial statement we needed to perform this method, we will put these

numbers into our spreadsheet. After doing the calculations we will continue on to the Price to

Book method.

Price to Book Method

To perform this method we need the data from three financial statements, the Income Statement,

Balance Sheet, and Shareholders Equity. First, from the Income Statement the numbers that we

need is the Net Income from previous years also the Comprehensive Income. From the Balance

Sheet we need the total Book Value of Equity of the company. Finally, the Shareholders Equity,

we will be able to calculate the dividends on a per share basis. After completing this method, we

will continue on to the third and final method the Price to Earnings Method.

Price to Earnings Method

For this method we will use the same numbers found on the financial statements that we used for

the previous two methods. For this method, the data that we use will be to a much lesser extent

as the previous two methods.

Predicting Growth Rates & Equity Required Rates

For the growth models we used, we forecasted different growth and equity rates. For the required

rate we looked at the historical returns of Verizon from the past 5 years. We then find that the

average return was 3%, we decided to use 6% which is much higher than the rate that was

calculated. We chose this number for multiple reasons they proved beneficial in the actual

number crunching. The first factor in deciding on the growth rate is the investment in the

subscription based TV app. Verizon is trying to take advantage in the cable television sector.

This industry is under constant change because of the success of online streaming media content.

Compared to traditional cable or satellite TV. We fill the loss of wireless subscribers will not

hurt them drastically. The past 3 years dividends has increased 2%-3%. Which I believe is a

steady increase for this mature industry. We set their increase in Cash Flow at 8%. We fill that in

some year that they will have better than expected growth and some years they will fell to meet

investor expectations. The P/E and P/B methods we set a target of 8% as mentioned earlier we

fill that some years that will be expectations. The idea of Verizon investing more in

entertainment and video streaming apps as well strengthen their wireless capabilities shows that

Verizon will be more or a powerhouse in the future.

Intrinsic Price Calculations

Avg. Return

Past 5 years.

Dividend

Growth Rate

Earnings

Growth Rate

Intrinsic Price Required

Rate

Cash Flow

Method

P/B Method

P/E Method

A table showing the methods we chose and their final rates and prices that we calculated using

different equations to get those conclusions.

Comparing the Intrinsic Price to the Market Price and our

Recommendations going forward.

We calculated three different Intrinsic Prices. The Cash Flow method which gave us a price

$66.31 per share. The Price to Book Method gave us a price of $66.35. Lastly, the Price to

Earning Method gave us a price of $50.36. The Price to Earnings Method gave us the lowest

Intrinsic Price of the three methods used.

As of April 24, 2015 Verizon Communication, Inc. (VZ) was last traded at $50.03. All three

methodologies gave us a higher price than the market. We feel the continued growth of the stock

price in Verizon will increase.

Possible Model Issues

The rates we used were more on the aggressive side than anything. With the three intrinsic prices

we feel that Verizon’s stock price is underpriced and should buy right now and hold it. It would

be extremely difficult. We agree that it will be extremely difficult for us to forecast the future

because anything can happen in the future.

Appendix

Appendix 1: Cash Flow Method

2012 2013 2014Net cash provided by operating activities 31,486,000$ 38,818,000$ 30,631,000$ Net cash used in investing activities (20,502,000)$ (14,833,000)$ (15,856,000)$ Free Cash Flow 10,984,000$ 23,985,000$ 14,775,000$ Free Cash Flow Growth from Prior Yr 118% -38%

My forecasts: 1) The cash flow will increase by 8% Ech of the next three years 8% 2) The cash flow will grow at a constant 4% after this three year horizon. 4% 3) The required rate is 6%

2015 2016 2017 2018Cash Flow growth rateCash Flow 15957000.00 17233560.00 18612244.80Discount Factor 1.06 1.12 1.19PV of cash flow 15053773.58 15337807.05 15627199.63PV of cash flow for 3 years 46018780.27Continuing value 967836729.6PV of CV 812614381Enterprise Value 858633161.3Net Debt (from Balance Sheet) 220410000 (Current maturities of long-term borrowing + long-term debt)Equity Value 638223161.3Number Shares outstanding 9625000.00Price Per share 66.31

Appendix 2 Price to Book Valuation

P/B Method

2012 2013 2014

Total Book Value $13,676.00Net Income $ 875,000.00 $ 11,497,000.00 $ 9,625,000.00 Comprehensive earnings $9,692.00 $12,035.00 $2,308.00# of shares outstanding 2,862 2,874 3,981

Net Income Per Share     305.73 4000.35 2417.73

Comprehensive Earnings Per Share     $3.39 $4.19 $0.58

Dividends Declared Per Common Share     $2.03 $2.09 $2.16

Comprehensive Earnings Growth Rate       23.66% -86.16%

Book value per share   3.44

My forecasts: 1) The comprehensive income will grow at 8%, 8%, 8% for the next three years.          

2) The Residual earnings will grow at a constant 5% after this five year horizon.           5%

3) The dividends will be $2.16 each year            

4) The long term required rate is 6%       6%    

2014 2015 2016 2017

Earnings Growth Rate 8% 8% 8%

EPS0.62

6 0.676 0.730

DPS 2.09 2.09 2.09

BPS 3.44 1.97 0.56 -0.80

P/B model

Residual Earnings0.42

0 0.558 0.697

Discount Factor1.06

0 1.1236 1.191016

PV of Residual Earnings0.39

6 0.497 0.585

Continuing value 73.171

PV of CV61.43

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Intrinsic Value 66.35

Appendix 3 Price to Earnings Ratio

P/E Method 2012

Comprenhensive earnings $12,035.00

Net Income

########## $ 11,497,000.00

# of shares outstanding   2,862

Comprehensive Earnings Per Share       $4.21

net income per share       $305.73

Dividends Declared Per Common Share 2.030

My forecasts: 1) The comprehensive income will grow at 8%, 8%, 8% for the next three year.

2) The AEG will grow at a constant 3% after this five year horizon. 3) The dividends will be $2.03 a year

4) The long term required rate is

2015 2016 2017Earnings Growth Rate 8% 8% 8%

EPS 0.885214770.95603

2 1.03251451DPS 2.03 2.03 2.03

P/E model

EPS0.95603

2Cum-Dividends earnings 1.15431451Normal Earnings 1.01339387Abnormal Earnings Growth 0.14092064Discount Factor 1.1 1.08PV of Residual Earnings 0 0.13048207PV of Residual earnings to the year t 0.212306005Continuing valuePV of CV 2.80928834Total value to be capitalized 3.021594345

Intrinsic Value 50.3

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