What's In The Cards For Verizon (VZ) This Earnings Season?

U.S. telecom behemoth Verizon Communications Inc (NYSE:VZ) is slated to report third-quarter 2017 results, before the opening bell on Oct 19.

Last quarter, Verizon’s bottom line was on par with the Zacks Consensus Estimate. The company’s earnings lagged the Zacks Consensus Estimate in two of the previous four quarters, with an average miss of 1.10%.

Let’s see how things are shaping up for this announcement.

Factors at Play

We remain concerned about Verizon’s operation in the highly competitive and saturated U.S. wireless industry.Spectrum crunch is a major issue in the domestic telecom industry. Moreover, the entry of major cable companies like Comcast Corp (NYSE:S) and Charter Communications Inc (NASDAQ:CHTR) has further intensified competition. Comcast has already completed the nationwide rollout of its wireless services, while Charter is planning to launch wireless services in 2018.

The company’s wireline division continues to suffer from persistent losses in access lines owing to competitive threats from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings from cable companies. Verizon ‘s plans to cut costs over the next four years and support the dividend payout with savings by 2022, implies the company’s high debt levels. Funding of dividends is difficult with rising debts.

On the flip side, Verizon has restructured its unlimited data plans and has teamed up with Amazon.com, Inc (NASDAQ:AMZN) to deliver virtual network services at a global scale. Verizon, along with Ericsson (BS:ERICAs) and Qualcomm (NASDAQ:QCOM) have achieved a download speed of 1.07 Gbps. Verizon’s 5G wireless network trials, plans to deploy fixed wireless version in 2018 and the deal to buy Straight Path Communications complements its 5G wireless expansion strategies. Verizon is preparing to launch an online TV streaming service later this year. We expect that these announcements will aid Verizon to gain subscribers in the to-be-reported quarter.

Additionally, we appreciate Verizon’s efforts to reward shareholders with a quarterly dividend of 59 cents per share, an increase of 1.25 cents or 2.2% from the previous quarter. This is the 11th consecutive year, wherein Verizon's board of directors has approved a quarterly dividend increase.

Buyout of Yahoo (NASDAQ:AABA) aids Verizon’s digital media suite. Meanwhile, Verizon continues to remain on track to fortify itself in the fiber and Internet of Things space through different deals.

Price Performance and A Closer View on Certain Important Metrics

On a positive note, the company portrays an impressive price performance. In the past three months, shares of Verizon soared 9.7% compared with the industry’s gain of 1.2%.

When compared with the market at large, the stock’s performance looks outstanding, as the S&P 500 index is pegged at 3.6%, over the same time frame.

We believe that the market expects this momentum to continue in the upcoming days, on the back of the overwhelming hike in the price. We also believe that the achievement occurred due to the better performance of certain other important non-financial metrics.

Improvement in subscriber addition holds promise for Verizon in the soon-to-be-reported quarter. The Zacks Consensus Estimate of postpaid wireless subscriber addition for third-quarter is 415 million.

The prepaid wireless segment is also expected to perform well in the third quarter of 2017, with net subscriber addition of 41.37 million.

The Zacks Consensus Estimate for the total wireless operating revenues for third quarter at $21,571 million.

Postpaid churn (another crucial metric for the wireless industry) is estimated to be 0.01% by Zacks.

Retail postpaid ARPA (average revenue per account) is expected at $136 by Zacks Consensus Estimate for the to-be reported quarter.

Earnings Whispers

Our proven model does not conclusively show that Verizon is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here as elaborated below.

Zacks ESP:Verizon has an earnings ESP of -0.22%. This is because the Most Accurate estimate is at 97 cents while the Zacks Consensus Estimate is pegged at 98 cents. 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 which increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult.

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

Key Picks

Here are some companies from the broader Computer and Technology sector , which houses Verizon, and have the right combination of elements to post an earnings beat this quarter.

Sprint Corp (NYSE:S) has an Earnings ESP of +33.84% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company is expected to report second-quarter 2017 results on Oct 24. Its earnings surpassed the Zacks Consensus Estimate in two of the previous four quarters, with an average of 129.47%.

Windstream Holdings Inc (NASDAQ:WIN) has an Earnings ESP of +18.03% and carries a Zacks Rank #3. The company is expected to release third-quarter 2017 earnings on Nov 6. The company’s earnings beat the Zacks Consensus Estimate in one of the previous four quarters.

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