Why Verizon Communications Inc. Shares Could Fly Above $55

Does this analyst make a good case? Or is it just more noise from Wall Street?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Jul 24, 2014 at 10:55AM
Technology and Telecom

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Verizon Communications (NYSE:VZ) gained slightly Thursday after FBR Capital upgraded the telecom gorilla from Market Perform to Outperform.

So what: Along with the upgrade, analyst David Dixon raised his price target to $57 (from $55), representing about 11% worth of upside to Wednesday's close. So while momentum traders might be turned off by Verizon's price-strength in recent months, Dixon's call could reflect a sense on Wall Street that its growth prospects still aren't fully baked into the valuation.

Now what: According to FBR, Verizon's risk/reward trade-off is rather attractive at this point. "Our more constructive outlook is driven by: (1) an expected near-term M&A-based tailwind from the expected announcement of a Sprint/T-Mobile combination (which the market is increasingly discounting --incorrectly, in our view) and an increase in deal approval probability upon announcement from current consensus, which remains low; (2) continued momentum in wireless (coupled with a stronger nexus with its wireline asset) with expectation for mid-single-digit growth; and (3) moderating decline in wireline driven by increased adoption and penetration of FiOS and FiOS Quantum," said Dixon. When you couple that upbeat outlook with Verizon's still-juicy 4%-plus dividend yield, it's tough to disagree with FBR's bullishness.