3. Introduction
Verizon 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
4. 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 Method
For 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 EarningsMethod
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.
5. 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.
6. 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 $50.03. All three
methodologies gave us a higher price than the market. We feel the continued growth of the stock
price in Verizon will increase.
7. Possible Model Issues
The rates we used were more on the aggressive side than anything. With the three intrinsic prices
we feel that Verizon’s stock price is underpriced and should buy right now and hold it. It would
be extremely difficult. We agree that it will be extremely difficult for us to forecast the future
because anything can happen in the future.
8. Appendix
Appendix 1: Cash Flow Method
2012 2013 2014
Net cash provided by operating activities 31,486,000$ 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 2018
Cash Flow growth rate
Cash Flow 15957000.00 17233560.00 18612244.80
Discount Factor 1.06 1.12 1.19
PV of cash flow 15053773.58 15337807.05 15627199.63
PV of cash flow for 3 years 46018780.27
Continuing value 967836729.6
PV of CV 812614381
Enterprise Value 858633161.3
Net Debt (from Balance Sheet) 220410000 (Current maturities of long-term borrowing + long-term debt)
Equity Value 638223161.3
Number Shares outstanding 9625000.00
Price Per share 66.31
9. Appendix 2 Price to Book Valuation
P/B Method
2012 2013 2014
TotalBook Value $13,676.00
Net 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) Thecomprehensive 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%
EPS 0.626 0.676 0.730
DPS 2.09 2.09 2.09
BPS 3.44 1.97 0.56 -0.80
P/B model
Residual Earnings 0.420 0.558 0.697
Discount Factor 1.060 1.1236 1.191016
10. PV of Residual Earnings 0.396 0.497 0.585
Continuing value 73.171
PV of CV 61.435
IntrinsicValue 66.35
Appendix 3 Price to Earnings Ratio
P/E Method
2012
Comprenhensiveearnings $12,035.00
NetIncome ##########
# of sharesoutstanding 2,862
Comprehensive Earnings Per Share $4.21
net income per share $305.73
11. Dividends Declared Per Common Share 2.030
My forecasts:1) The comprehensive income will growat8%, 8%,8% forthe nextthree year.
2) The AEG will growat a constant3% afterthisfive yearhorizon.
3) The dividendswill be $2.03 a year
4) The longtermrequiredrate is
2015 2016 2017
EarningsGrowth Rate 8% 8% 8%
EPS 0.88521477 0.956032 1.03251451
DPS 2.03 2.03 2.03
P/E model
EPS 0.956032
Cum-Dividendsearnings 1.15431451
Normal Earnings 1.01339387
Abnormal EarningsGrowth 0.14092064
DiscountFactor 1.1 1.08
PV of Residual Earnings 0 0.13048207
PV of Residual earningstothe yeart 0.212306005
Continuingvalue
PV of CV 2.80928834
Total value tobe capitalized 3.021594345
Intrinsic Value 50.36
