“You know, people tend to like to buy companies that are doing well.”
– Walter Schloss
In today’s Model Vs. Market post we’re looking at Verizon Communications. Verizon and other media companies have been under pressure due to “cable cutters” and that may be creating a buying opportunity. Here is the company’s profile:
Verizon Communications Inc. is a holding company engaged in providing communication, information and entertainment products and services geared for consumers, businesses and government agencies. The firm’s business is divided into: Wireless (wireless voice and data services and equipment sales) and Wireline (wire-connected voice, data and video communications products and services including broadband video and data, corporate networking solutions, data center and cloud services, among others). Its consumer products include smartphones, tablets, Internet access devices and mobile devices.
The firm enjoys a global market presence, servicing top global companies engaged in data center and cloud services delivery, telecommunications, security and managed network services, local and long distance voice services as well as government entities. The company was incorporated in 1983 and its headquarters are located in New York, New York.
What is Verizon worth?
Our DCF valuation model is indicating that shares of Verizon are worth $65 which is 39% above its current market value. Here are the key assumptions used to arrive at this value:
- Revenue Growth – Over the last 5 years revenue has grown at an average rate of 4.5%. The model assumes the same growth rate for the next 4 years followed by a terminal growth rate of 2.5%.
- Profitability – Over the last 5 years the EBITDA margin has averaged 30.0%. The model assumes this same margin going forward.
- Depreciation – Depreciation in 2014 was 13.0% of revenue. The model assumes this same rate of depreciation going forward.
- Income Taxes – The average effective tax rate for the last 5 years was 11.4%. The model assumes this same effective tax rate going forward. Increasing the effective tax rate to 40% reduces the valuation to $42 per share.
- Capital Investment – Over the last 5 years the company has spent 14.7% of its revenue on capital investments, net of dispositions. The model assumes the same level of investment going forward.
- Working Capital – After netting out cash, short-term investments and short-term debt the company operates with positive working capital. The model assumes this will continue at the same rate as revenue grows.
- Discount Rate – The assumed cost of equity is 10% and the assumed cost of debt is 3.5% over the 10-year U.S. treasury rate. The company’s weighted average cost of capital is estimated at 8.15% in the model. Reducing the cost of equity to 8% increases the valuation to $92 per share.
This model was created by extrapolating the last 5 years of performance into the next 5 years of performance. Before making an investment decision you should run your own model with your own assumptions based on your own research of the company. Download this model to perform your own valuation and let us know what you think shares of the company are worth on Twitter @tagnifi.
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Disclaimer: The information on this web site is not intended to provide investment, tax, or legal advice, and nothing on the site should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by TagniFi or any third party. You alone are solely responsible for determining whether any investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation.