KeyBanc Downgrades Verizon's Rating

KeyBanc Capital Markets analysts have downgraded Verizon (NYSE:VZ) shares from Overweight to Sector Weight following disappointing quarterly results.

Reasons for Downgrade

The analysts highlighted several key factors for this rating change:
– Limited EBITDA Growth Potential: Expectations for EBITDA growth acceleration in 2025 appear limited.
– Impact of Frontier Acquisition: The potential acquisition of Frontier Communications (OTC:FTRCQ) Parent Inc (NASDAQ:FYBR) may have negative effects.
– Slowing Postpaid Phone Additions: Improvements in Verizon Consumer Group's postpaid phone net additions are slowing, coupled with increased device subsidies.

Analysts noted, “We will look for a pullback in valuation and/or upside to expectations to become more constructive.”

2024 Guidance

Despite the downgrade, Verizon has maintained its guidance for 2024, projecting:
– 2.0-3.5% year-over-year growth in total Wireless service revenue
– 1.0-3.0% growth in adjusted EBITDA

Verizon aims to meet or surpass the midpoint of these projections, keeping capital spending guidance steady at $17.0 billion to $17.5 billion.

Future Expectations

KeyBanc forecasts a slowdown in wireless service revenue growth and approximately 2% EBITDA growth for 2025. They estimate free cash flow (FCF) will decline to less than $18 billion, impacted by projected capital spending of around $18 billion and potentially higher cash taxes. The analysts noted, “For the stock to appreciate further, EBITDA growth needs to accelerate towards 3%+, capex should remain at the low end of the range, and cash taxes would need changes in the corporate tax rate.”

Adjusted Estimates

The rating change led to a reduction in their estimates for Verizon's stock, resulting in a 0.4% to 1.2% decline for 2024/2025 adjusted EBITDA and a significant divergence in FCF forecasts, showing a 7.9% increase for 2024 but a 7.9% decrease for 2025.