27 April 2020

Did Investors Take the Wrong Call on Verizon?

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What’s happening: Shares of Verizon Communications came under pressure on Friday even as the company reported better-than-expected earnings for the first quarter.

What happened: Verizon’s shares have held up these past months, despite the coronavirus-related broader market downturn. The stock declined, however, after the company’s earnings release on Friday. This may have been partly driven by profit taking, as traders had bought into the stock ahead of the quarterly results. However, some of the pressure was caused by concerns over the decline in Version’s subscribers in the first quarter.

Investors had been expecting an increase in subscribers for the provider of internet and mobile phone services. Despite the disappointment on that front, was the selloff in Verizon’s stock hasty?

How were the results:
Verizon’s reported profit growth for the first quarter, although its sales were marginally lower.

  • Adjusted earnings climbed to $1.26 per share, from $1.20 per share from the same quarter last year. The figure exceeded the consensus estimate of $1.22 per share.
  • Operating revenues slipped to $31.6 billion, from $32.1 billion in the year-ago quarter, missing expectations of $32.4 billion.

Rival AT&T had reported disappointing results for both revenues and earnings earlier in the week.

Why it matters: Verizon has been one of the beneficiaries of the pandemic, as people and business struggle to communicate in the midst of a lockdown. On the other hand, the company has had to close as many as 70% of its retail stores, resulting in a decline in device sales. With this, the New York-based company lost 68,000 phone subscribers during the quarter, with a decline in customer activity and device volumes.

Analysts pointed out that this churn rate is within the normal range that the company has recorded for the first quarter in the past few years. And, the telecoms giant is encouraging customers to buy devices online.

Meanwhile, VerizonMedia has suffered immensely due to COVID-19 with massive cutbacks in advertising rates. VerizonMedia’s revenues declined 4% to $1.7 billion in the first quarter

Verizon followed AT&T’s footsteps and withdrew its revenue guidance for the full year. The company also cut its full-year earnings forecast. Verizon now projects adjusted earnings growth between -2% and +2%, down from its earlier projection of 2% to 4% growth.

In a bid to encourage activity, Verizon is now providing additional high-speed data of 15GB, while waiving off activation and late fees. The company is also offered unlimited calling minutes to subscribers with older plans.

Verizon announced the acquisition of Zoom’s rival BlueJeans, as lockdowns have forced people to work from home during the pandemic.

At a time when most companies are scrapping their dividends, Verizon offers a healthy dividend yield of 4.2%.

How the shares have performed so far: Shares of Verizon lost 0.6% on Friday. The stock has surged 16% over the past month.

What to watch: Despite various coronavirus-related disruptions, the US-based wireless company plans to roll out its next-gen 5G wireless technology and improve its current 4G network. Investors look forward to a rise in subscriber numbers over the coming months.

The Markets Today

     

European markets will be in focus today, after the stocks broke their two-day winning streak on Friday.

Context: European stocks closed lower on Friday after the EU summit failed to agree on the longer-term recovery plan for the economy. Doubts over the potential coronavirus drug from Gilead also hit market sentiment.

Details: European leaders signed off a short-term rescue package of €500 billion to support the region’s governments. However, the leaders failed to reach an agreement aimed for a longer-term economic recovery.

Market sentiment was also hurt by reports of Gilead’s drug remdesivir failing to improve the condition of coronavirus patients. However, the drug maker noted that it was forced to terminate the study early due to low enrolment and the results published are inconclusive.

Investors were also concerned about disappointing data released by the UK, with retail sales declining at the fastest pace in history in March

The pan-European Stoxx 600 index fell 1.1%, with most sectors closing in negative territory. Travel and leisure stocks declined the most, falling over 3% on Friday. The FTSE 100 was down 1.28%, while the German 30 closed lower by 1.69%.

Shares of Nestle rose around 2% after the company reported strong results for the first quarter, with consumers stockpiling food items amid lockdowns. Sanofi’s stock also gained more than 2% after the French pharma company reported its first-quarter results and confirmed its guidance for 2020.

What to watch: Investors continue to assess the daily coronavirus figures, with the total global cases exceeding 2,971,470. The number of positive COVID-19 cases in Spain has surpassed 226,620 with around 23,190 deaths. Italy has confirmed more than 197,670 cases with 26,640 fatalities.

The economic calendar is light for today, with only France reporting initial jobless claims for March, which is expected to be at the lowest level since July 2013.

Other Markets: US indices closed higher on Friday, with the Dow, S&P 500 and Nasdaq 100 up gaining 1.11%, 1.39% and 1.65%, respectively.

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What else to watch today

     

Indonesia’s loan growth, Mexico’s unemployment rate, Russia’s retail sales, business confidence, corporate profits, real wage growth and gross domestic product, Canada’s foreign stock investment as well as the US Dallas Fed manufacturing index.

 

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