Verizon Earnings Preview: What Might Be Expected from Q4 Results?

Verizon Communications (VZ) reports Q4 earnings before market open on Tuesday, Jan. 23. Here’s a look at what might be expected from the telecom giant.

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As the broader indices rallied in 2017, it wasn’t a great year for telecom stocks and Verizon (VZ) is pretty much starting 2018 at the same levels it was at when 2017 started. The telecom giant is scheduled to report fourth-quarter earnings before market open on Tuesday, Jan. 23.

In the third quarter, VZ reported a gain of 603,000 wireless retail postpaid connections and a customer churn rate of 0.75% (churn rate is the percentage of subscribers who discontinue services). VZ added 30,000 postpaid accounts in the same quarter, an improvement from the 107,000 it lost in the third quarter of 2016.

In its wireline segment, the company has been expanding its FiOS offering—its fiber optic Internet, telephone and television services—in recent quarters. VZ reported that total FiOS revenues grew 4.8% year over year, whereas total revenue in the wireline segment increased 1.1% to $7.7 billion. For Q3, VZ reported a gain of 66,000 FiOS Internet connections, while FiOS Video connections declined by 18,000.

For Q4, VZ is expected to report $0.88 in adjusted earnings per share (EPS), up two cents compared to last year, on revenue of $33.15 billion, according to third-party consensus analyst estimates. Revenue is projected to increase 2.5% year over year. Management has previously indicated that they expect fiscal 2017 revenue and EPS to be roughly in line with fiscal 2016’s results.

After tax reform was passed, VZ said it will result in a one-time reduction in net deferred income tax liabilities of about $16.8 billion in Q4, which it expects will have a positive $4.10 impact on EPS for fiscal 2017, although it won’t have an impact on its cash flow statement for the year.

Outside of tax reform, another area that might come up on this quarter’s call is the FCC’s recent vote to repeal net neutrality rules that were put in place in 2015. The repeal is widely viewed as beneficial to Internet Service Providers and other telecom companies since it reduces some of the regulations in the industry. 

In September, VZ’s board of directors authorized a dividend increase, bringing the quarterly payment to $0.59 per share. At Friday’s closing price of $51.91, the stock has a dividend yield of 4.55%. In addition to the dividend, CFRA analysts expect VZ’s cash usage to be primarily focused on network upgrades in areas like 5G and its gigabit Internet connection, as well as reducing debt. 

Stock chart showing 2017 performance of Verizon (VZ)

VERIZON PERFORMANCE SINCE 2017.

Verizon (VZ), along with most of telecom, underperformed in 2017. Since mid-November, the stock moved up from the low-$44 range and has recently been trading around $52 to $54, not too far from where it was a the start of 2017. The bottom chart shows the implied volatility for VZ. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Verizon Options Trading Activity

Shares moved higher from the $44 range VZ was trading at in mid-November and have been trading in a tighter range since early December.  The stock closed at $51.91 on Friday and, around the upcoming earnings release, options traders have priced in about a 2.5% potential stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. As of this morning, implied volatility is at the 80th percentile.

In short-term trading at the January 26 weekly expiration, calls have been active at the 52 and 52.5 strike prices. Trading has been lighter on the put side, with most of the activity at the 52 and 53 strike prices.

Looking at the February 16 monthly expiration, trading has also been heavier on the call side. On Friday, volume for the 52.5-strike call was 11,423 contracts, compared to 248 contracts for the 52.5-strike put, the highest volume on the put side that day.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

Over the next few days, quite a few Dow components report. Along with VZ, Johnson & Johnson (JNJ) and Procter & Gamble (PG) report tomorrow morning. General Electric (GE) reports before the opening bell on Wednesday, Jan. 24 and Ford (F) reports the same day after market close. On Thursday, Jan. 25, Caterpillar (CAT) reports before the open and Intel (INTC) reports after the close.

Next week is a tech-heavy one, with Alphabet (GOOGL), Alibaba (BABA), Amazon (AMZN), Apple (AAPL), Facebook (FB) and Microsoft (MSFT), among others, on the docket. If you have time, make sure to check out today’s market update to see what else is happening across the markets.

Good Trading,
JJ
@TDAJJKinahan

Call Us
800-454-9272

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