Shares of telecommunications giant Verizon (VZ 0.99%) jumped 5.7% through 11:30 a.m. ET after meeting analyst forecasts for Q4 earnings and beating on sales Tuesday morning.
Heading into its fourth and final quarterly report for 2023, Wall Street had forecast that Verizon would earn $1.08 per share (adjusted for one-time items) on sales of $34.6 billion. Verizon hit the earnings number on the nose and edged out sales projections, delivering $35.1 billion in sales for the quarter.
NYSE: VZ
Key Data Points
Verizon sales and earnings
But not all the news was good. Sales for the final quarter of the year may have been better than expected, but they still declined slightly (down 0.3%) in comparison to Q4 2022. Adjusted earnings were also down year over year, and when calculated according to generally accepted accounting principles, Verizon actually lost money for the quarter -- $0.64 per share -- versus earning a GAAP profit of $1.56 per share in Q4 2022.
These results were both better and worse than Verizon's numbers for 2023 as a whole. For the full year, sales were down worse -- 2.1% to $134 billion -- but GAAP profits were positive $2.75 per share. (The bad news: This was barely half the $5.06-per-share GAAP profit that Verizon earned for all of 2022.)
On the other hand, Verizon scored a big increase in free cash flow (FCF) in 2023, with total cash profits for the year up 33% to $18.7 billion. If you ask me, that's the really good news today -- and the best reason for bidding up Verizon stock.
Where will Verizon be in 2024?
Now what about 2024? How will Verizon aim to do even better this year than last?
Well, first, the company needs to grow its business instead of shrinking it, and Verizon has a plan to do just that, aiming for somewhere between 2% and 3.5% sales growth in 2024. Management didn't give a GAAP number for this year's earnings target but did say that its adjusted profit should range from $4.50 to $4.70 per share.
And here's the problem with that range: Its entirety falls below the $4.71 per share in "adjusted" earnings that Verizon says it earned in 2023! Thus, management appears to be planning to grow its sales but shrink its profits this year.
Now, the good news is that Verizon does say its capital spending should be lighter this year than last (as little as $17 billion to $17.5 billion, which would be significantly less than the $18.8 billion Verizon spent on capex in 2023). If cash flow holds up, therefore (and with revenues growing again, it should), Verizon should be able to end up growing its free cash flow even if "earnings" take a hit this year.
My back-of-the-envelope math suggests FCF could even rise as high as $20.6 billion in 2024, which, when weighed against the company's $175.6 billion market capitalization, suggests Verizon stock is selling for a P/FCF ratio of only 8.5x current-year earnings. For a business growing at 2% and paying a 6.7% dividend yield, that seems a fair price to pay, to me.
