Three Reasons to Avoid Verizon and One Stock to Buy Instead

Verizon has been treading water for the past six months, posting a small 1.8% return and holding steady at $41.22. The stock also lagged the S&P 500 index’s 10.5% gain in that period.

Is now the time to buy Verizon, or should you be cautious about adding it to your portfolio? Check out our research report to see our analyst team’s view; it is free.

We’ll leave this issue out for now. Here are three reasons we avoid VZ and a stock we prefer to own.

Founded as Bell Atlantic in 1984 following the split of Bell System into seven companies, Verizon (NYSE: VZ) is a telecom giant that provides a variety of communications and internet services.

Examining a company’s long-term sales performance reveals insights into its quality. Any business can achieve success in the short term, but a top-tier business continues to grow for years. Unfortunately, Verizon has struggled to grow demand, with its $134.2 billion in sales in the last 12 months close to its revenue five years ago.

Revenue growth can be divided by the number of customers and the average spend per customer. Both are important because an increased customer base leads to more upsell opportunities, and revenue per customer indicates how successful a company is in implementing its upsell strategy.

Verizon’s total customers have remained steady over the past two years, reaching 144.7 million in the latest quarter. This performance was lackluster and indicates that the company is facing difficulties securing new contracts. This also suggests that competition or market saturation may increase.

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it raises (debt and equity).

We generally prefer to invest in businesses with high returns because it means they have viable business models, but disposition What often happens in a company’s ROIC is what surprises the market and moves its stock price. On average, Verizon’s return on investment has decreased by 4.5 percentage points per year over the last several years. These declines, combined with already low returns, indicate that profitable business opportunities are few and far between.

Verizon falls short of our quality standards. The stock, whose shares have underperformed the market lately, is trading at 8.7 times its forward price-to-earnings ratio (or $41.22 per share). This valuation may be reasonable, but the company’s shaky fundamentals pose too much downside risk. There are superior stocks to buy right now. We prefer to buy Wabtec, leading locomotive services provider benefiting from upgrade cycle.

The Story Continues