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Stock Analyst Update

Capital Spending Cut for Verizon Surprises

Our narrow moat rating and $58 fair value estimate remain intact.

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 Verizon (VZ) posted solid third-quarter results, with particular strength around wireless customer growth, revenue per wireless customer, and free cash flow generation. The firm again reduced expectations for 2018 capital spending, a move we find curious given where the industry is in the investment cycle. On the disappointing side, Oath revenue declined 7% year over year and management backed off its 2020 revenue target for this segment. We don’t expect to significantly alter our long-term expectations, leaving our narrow moat rating and $58 fair value estimate intact. While we continue to favor Verizon strategically among U.S. telecom companies, we believe the shares are roughly fairly valued.

As the first U.S. wireless carrier to report earnings, we don’t have much context around Verizon’s relative performance, but the numbers look good. The firm added 295,000 net postpaid phone customers, its best third-quarter performance in three years. Customer defections ticked up modestly year over year, but gross additions (primarily customers leaving other carriers and choosing Verizon) picked up more. This dynamic makes sense given that Comcast and Charter are now marketing wireless services. Given Verizon provides the network supporting these offerings, customers switching to the cable giants isn’t a total loss. Also, average revenue per postpaid account increased sequentially for the second consecutive quarter, as more customers migrate to unlimited plans and choose more expensive service tiers. Wireless services revenue growth continues to improve, hitting 2.6% during the quarter.

Wireless profitability also continues to move in the right direction, benefiting from revenue growth and Verizon’s efforts to reduce costs. Importantly, in our view, cost-cutting is showing up primarily in sales and overhead expenses rather than network costs. We expect the cost to operate the wireless network will increase over time as Verizon maintains its leadership position. 

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Michael Hodel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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