A Communications Giant
In this edition of the Smart Investor newsletter, we examine a communications powerhouse. But first, let us delve into the latest Portfolio news and updates.
Important Note: Due to the volatility in the markets this week, we are not selling any Portfolio stocks, but instead taking a “wait and see” approach. We believe that the market may see further downside and are weighing our actions.
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Portfolio Updates
❖ Texas Pacific Land’s (TPL) Q2 results fell short of analysts’ expectations. However, the company’s water services and operations segment achieved record water sales revenue of $40.7 million in the second quarter, up by around 8% year-over-year. Furthermore, its revenue from water royalties stood at $25.3 million, a surge of 21.4% year-over-year. The water services and operation segment posted profits of $34.5 million in the second quarter.
❖ Emerson Electric (EMR) announced Q3 results that fell short of consensus estimates but its underlying orders increased by 3% year-over-year in the fiscal third quarter. In addition, the company declared a quarterly cash dividend of $0.525 per share. The industrial company expects its revenues to increase by 15% year-over-year in FY24 while adjusted earnings are estimated to be between $5.45 and $5.50 per share, above analysts’ expectations.
❖ Parker-Hannifin (PH) reported upbeat Q4 results as strong demand in aerospace services helped the company exceed sales and profit estimates, despite challenges in its industrial segment. The company has projected FY25 sales growth in the range of 1.5% to 4.5% while adjusted earnings are forecasted to be between $26.30 and $27 per share, exceeding Street estimates.
❖ TSMC (TSM) saw rising demand for its AI chips as its revenues for July increased by 23.6% from June to NT$256.95 ($7.9) billion and were up 44.7% year-over-year. For the period from January through July, the chip giant’s revenues rose by 30.5% year-over-year to NT$1,523.11 ($47.11) billion. The company reported robust results for the second quarter and issued an optimistic outlook for the third quarter, citing strong demand in both the smartphone and AI sectors.
❖ Applied Materials (AMAT) is expected to announce its Q3 results on August 15. Wall Street analysts have projected that the semiconductor company will report earnings of $2.03 per share on revenues of $6.7 billion. AMAT has slid by 18.1% over the past month due to the broader tech sell-off in the market. However, Citi analysts believe that AMAT is a Buy with the recent pullback given that its FY24 and FY25 earnings are expected to remain steady.
❖ Super Micro Computer (SMCI) has plunged by more than 35% over the past month amid a broader market sell-off and concerns over its contracting gross margins in the fiscal fourth quarter. However, the company issued a strong FY25 guidance with revenues projected to be $28 billion at midpoint, well above analysts’ expectations of $23.6 billion. In the fiscal first quarter, SMCI has forecasted adjusted earnings of $8.27 per share on revenues of $6.5 billion at midpoint, higher than consensus estimates of earnings of $7.68 per share on revenues of $5.47 billion. The company’s robust forecast highlights that the demand for its AI chips remains strong.
❖ Applied Industrial Technologies (AIT) is expected to announce its fiscal fourth-quarter results on August 15. Analysts expect the industrial giant to post earnings of $2.51 per share on revenues of $1.19 billion.
❖ Google (GOOGL) dipped in trading on Tuesday after a report that the U.S. Justice Department may push for the tech giant to be broken up for its illegal monopoly over searching information over the Internet. According to the report, the Justice Department is currently seeking input from outside companies over this move. The Justice Department’s decision follows a U.S. judge’s ruling that the tech giant violated antitrust law and established an illegal monopoly as the world’s default search engine. Meanwhile, Google unveiled a new Pixel 9 smartphone series and a new Android software update that utilizes its Gemini AI assistant at a company event on Tuesdays.
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Portfolio Earnings and Dividend Calendar
❖ There are two Portfolio companies scheduled to report over the next week. These companies include Applied Materials (AMAT) and Applied Industrial Technologies (AIT) on August 15.
❖ The ex-dividend date for Applied Industrial Technologies (AIT) and Emerson Electric Co. (EMR) is August 15th and August 16th, respectively.
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New Buy: Verizon Communications (VZ)
Verizon Communications is a provider of communications, technology, information and entertainment products and services to consumers and businesses. The company is headquartered in New York and is one of the largest global providers of communications services. With a market capitalization of $171.6 billion and annual revenues of $134 billion, VZ ranks #26 in the Fortune 500 list of largest U.S. companies. Interestingly, the company serves 99% of Fortune 500 members.
The company’s origins trace back to 1984 when it was established as “Bell Atlantic” following the breakup of the Bell System into seven regional operating companies. In 2000, after acquiring GTE and expanding its services across most of the U.S., the company rebranded as “Verizon.”
In 2015, Verizon further broadened its horizons by entering the online media and content space through acquisitions of AOL and later, Yahoo! Inc.
Verizon began trading on the New York Stock Exchange (NYSE) in 2000 under the symbol “VZ.” The company is also listed on the NASDAQ Global Select Market under the same ticker. Since 2004, Verizon’s stock has been a key component of the blue-chip Dow Jones Industrial Average.
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Verizon’s Business Segments
Verizon operates through two key segments, strategically managed as distinct business units: Verizon Consumer Group (Consumer) and Verizon Business Group (Business).
The Consumer segment delivers wireless and wireline communications services and products tailored to individual customers. Verizon’s wireless services operate across one of the most extensive networks in the U.S. under the Verizon family of brands, as well as through wholesale and other partnerships. Additionally, Verizon offers Fixed Wireless Access (FWA) broadband via its cutting-edge fifth-generation (5G) and fourth-generation (4G) Long-Term Evolution (LTE) networks, providing an alternative to traditional landline internet.
The company’s wireline services are available in nine states across the Mid-Atlantic and Northeastern U.S., as well as Washington D.C., through its 100% fiber-optic network under the Verizon Fios brand. In areas not served by Fios, Verizon offers services over a traditional copper-based network. In 2023, the Consumer segment generated $101.6 billion in revenue, accounting for approximately 76% of Verizon’s consolidated revenues.
The Business segment caters to corporate clients, offering a wide range of wireless and wireline communications services and products, including FWA broadband, data, video, and conferencing services. It also provides corporate networking solutions, security and managed network services, local and long-distance voice services, and network access for various Internet of Things (IoT) products and services. In 2023, the Business segment generated $30.1 billion in revenue, representing around 22% of Verizon’s consolidated revenues.
For over 15 years, Verizon has heavily invested in strengthening its network, which now provides the broadest coverage in the industry. This investment, combined with the company’s stellar reputation—evidenced by winning the majority of J.D. Power’s network quality awards for nearly three decades, has solidified Verizon’s competitive position. The company’s wide economic moat and strong market presence enable it to consistently generate significant free cash flows.
Furthermore, the company is heavily invested in strengthening its 4G and 5G wireless networks, I as is evident in its ongoing deployment of new network architectures and technologies. In 2023, the company continued to expand its C-Band spectrum, enhancing and monetizing its networks, platforms, and solutions.
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Verizon’s Improving Financials
Verizon delivered mixed results in the second quarter, with its topline falling short of consensus estimates. However, the company reiterated its FY24 guidance and remains on track to meet its targets. Verizon anticipates wireless service revenue growth between 2% and 3.5%, and expects adjusted earnings per share to reach $4.60 at the midpoint, slightly above analysts’ estimates of $4.57.
The company’s three key growth drivers—wireless service revenue, adjusted EBITDA, and free cash flow—remain solid. In the second quarter, these metrics grew by 3.5%, 2.8%, and 3% year-over-year, respectively. With a free cash flow margin of 10.38%, Verizon ranks among the top 40% in the industry. As the company continues to pay down its debt and lowers its capital expenditure guidance to $17 billion to $17.5 billion for FY24, down from $18.7 billion in 2023, free cash flow is expected to improve further.
Verizon’s earnings are forecasted to grow by 12.9% annually, while revenue is projected to increase by 1.6% each year. In the second quarter, Verizon added 148,000 net wireless phone subscribers, surpassing analysts’ expectations of 127,870. This growth was driven by the popularity of its flexible myPlan, which offers discounted streaming services like Netflix and Disney+. Since its launch in May last year, myPlan has been adopted by 30% of Verizon’s subscribers, helping the company compete effectively with AT&T and T-Mobile.
Verizon’s execution in consumer mobility has consistently improved since early last year, with strong momentum continuing. Consumer postpaid phone gross additions rose by 12% year-over-year, a remarkable achievement. The total postpaid phone net additions of 148,000 mark significant year-over-year and sequential gains, and Verizon expects to maintain positive postpaid phone net additions in the consumer segment for the full year.
In wireless services, Verizon recently implemented several price increases expected to generate over $1 billion in annualized wireless service revenue. Although the company recorded consumer postpaid phone net losses of 8,000 for the quarter, this was a significant sequential and year-over-year improvement. Verizon anticipates positive consumer postpaid phone net additions for the full year without relying on its second number offering.
Verizon’s other segments, including broadband and Verizon Business, also demonstrated strong performance, showcasing the company’s continued robust execution across its operations.
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Verizon’s Debt and Returns in Focus
Despite lingering concerns about its substantial debt, the telecom giant has made steady progress in managing its financial obligations. Over the past five years, the company has reduced its debt-to-equity ratio from 1.95 to 1.56, demonstrating its commitment to financial discipline. The company’s operating cash flows comfortably cover 23.6% of its debt, and its interest payments are well covered, with EBIT at five times its interest obligations.
In the second quarter, the company made a slight improvement in its net unsecured debt-to-adjusted EBITDA ratio, bringing it down to 2.5 from 2.6 in the previous quarter. Looking ahead, the company aims to reduce this ratio further to a range of 1.75 to 2 times.
Currently, the company boasts a return on equity of 11.8%, placing it in the top 40% of the telecommunications industry, with expectations of reaching 16.9% in three years. Additionally, its return on assets and return on invested capital (ROIC) outperform more than half of its industry peers.
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Dividends and Stock Buyback Policies
Verizon’s most recent quarterly dividend was $0.67 per share, reflecting a robust 6.4% dividend yield, placing it among the top 25% in the telecommunications industry and higher than the sector average of 2.5%. The company has consistently paid dividends since its formation in 1984 and has increased them for the past 14 years. Furthermore, the company’s current cash payout ratio of 80.4% shows that its dividend payments are well covered by its cash flows.
Verizon’s dividend payout ratio currently stands at 57.1%, a slight increase from previous years. As for stock buybacks, the company has decided to hold off until 2025, prioritizing debt reduction and boosting free cash flows. Verizon plans to resume buybacks once its unsecured debt-to-adjusted EBITDA ratio reaches 2.25x.
VZ- A Value Buy
It’s worth noting that Verizon has underperformed the S&P 500 year-to-date, delivering a 4.8% return compared to the index’s 14.7%. However, analysts believe the stock is trading at a significant discount, about 71.3% below their fair value estimates.
Currently, Verizon trades at 15.3 times its earnings, well below the peer average of 21.4 times, suggesting it offers strong value relative to its competitors. Even technical indicators from the past month show a Buy consensus, and Wall Street analysts maintain a cautiously optimistic outlook, rating Verizon as a Moderate Buy.
Investing Takeaway
Verizon remains a stable, low-risk business with an extensive customer base and a strong competitive position. The company has made strategic investments that should drive revenue and earnings growth, further enhancing its already robust cash-generation capabilities. The company’s long-term fundamentals remain intact with a positive outlook, making it a valuable addition to the Smart Investor portfolio.
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Portfolio Stocks Under Review
❖ We are placing Martin Marietta Materials (MLM) under review as its Q2 results missed estimates, disappointing investors. Furthermore, the materials company lowered its adjusted EBITDA guidance to $2.2 billion at the midpoint due to the slowdown in the private construction sector but expects this slowdown to be brief. The company’s expectations about the brief slowdown are due to the single-family housing market being underbuilt and the potential for more favorable monetary conditions starting in September. However, we prefer to adopt a wait-and-watch mode for the stock.
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Smart Investor’s Winners Club
*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Despite the turbulence in the stock market, overall, the list of Winners has expanded to 16 stocks.
The Winners list counts 16 stocks: SMCI, GE, AVGO, ANET, TSM, AMAT, ORCL, EME, APH, GD, VRTX, CHKP, TPL, PH, HWM, ITT
REGN remains a contender for re-entry, with a 23.5% gain since its purchase date.
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Smart Investor Portfolio
| Portfolio YTD Return |
Portfolio Volatility (Beta) | Portfolio Dividend Yield |
| 16.78% | 1.13 | 0.68% |
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