Verizon (VZ) Q1 Earnings: What Lies Ahead For The Stock?

Verizon Communications Inc. (NYSE:VZ) is scheduled to release first-quarter 2018 results before the opening bell on Apr 24. The company is likely to record higher revenues from the Wireless segment, which accounts for the lion’s share of total revenues, on a year-over-year basis.

Whether this will benefit the bottom line of the company remains to be seen.

Top-Line Expansion

Verizon offers one of the most efficient wireless networks in the United States. The telecom behemoth is continuously investing in wireless and wireline fiber-optic networks. Verizon plans to launch next-generation 5G wireless residential broadband services in three to five U.S. markets in 2018. The first commercial launch is scheduled in Sacramento, CA, in the second half of 2018.

During the first application of 5G wireless network, Verizon will be using millimeter-wave spectrum (radio signals) instead of copper or fiber cables to provide customers with unmatched wireless speeds for Internet access. Verizon has started conducting field trials for its upcoming 5G wireless network with partners. The company is looking at mobile hotspot and home-based fixed wireless for initial deployment of the next-generation 5G wireless networks in the country in 2018. A full phased 5G wireless network is likely to be offered in 2020.

At the same time, Verizon is systematically diversifying itself as a major player in the digital content and online advertising space. The company has formed a new division called Oath to oversee assets of Yahoo (NASDAQ:AABA) and AOL, including more than 20 brands like Yahoo News, HuffPost, Engadget, TechCrunch, Yahoo Finance, Yahoo Sports and Tumblr.

Buoyed by such tailwinds, the Zacks Consensus Estimate for the Wireless segment’s revenues in the to-be-reported quarter is currently pegged at $21,315 million, which is relatively higher than the year-ago tally of $20,878 million. The higher revenue expectations can be attributed to an uptick in demand and an upgrade to state-of-the-art infrastructure.

Total revenues for the company are expected to be $31,141 million compared with $29,814 million in the prior-year quarter.

Other Key Factors

On the other hand, the U.S. telecom market continues to witness intense pricing competition, as success to a great extent depends on technical superiority, quality of services and scalability. The wireless industry is likely to witness more competition in 2018 with the entry of cable MSOs (multi service operators). Adoption of several unlimited data plans will likely result in lower average revenue per user. Spectrum crunch has also become a major issue in the U.S. telecom industry. Most of the carriers are finding it increasingly difficult to manage mobile data traffic, which is growing by leaps and bounds. The situation has become even more acute with the growing popularity of iPhone and Android smartphones as well as rising online mobile video streaming, cloud computing and video conferencing services.

In an effort to expand its customer base, Verizon is spending heavily on promotion and is also offering lucrative discounts. These strategies are likely to impact the company’s EBITDA and EBITDA service margins in the quarter. Revenues from the Wireline segment are likely to be $7,603 million, down from $7,876 million owing to competitive pressure from voice-over-Internet protocol service providers and aggressive triple-play (voice, data, video) offerings by cable companies. In order to make Wireline profitable, Verizon is making significant investments and is streamlining its cost structure. These are likely to weigh on the company’s revenues and margins.

Our proven model does not conclusively show that Verizon is likely to beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -1.27%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Verizon has a Zacks Rank #3. Although this increases the predictive power of ESP, we need to have a positive ESP to make us confident of an earnings beat.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Allegheny Technologies Incorporated (NYSE:ATI) has an Earnings ESP of +9.38% and a Zacks Rank of 1. The company is expected to release quarterly numbers on Apr 24. You can see the complete list of today’s Zacks #1 Rank stocks here.

Century Aluminum Company (NASDAQ:CENX) , with an Earnings ESP of +29.41% and a Zacks Rank of 1, is slated to report results on Apr 24.

Watsco, Inc. (NYSE:WSO) has an Earnings ESP of +3.96% and a Zacks Rank of 2. The company is likely to release earnings on Apr 24.

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