KeyBanc cuts Verizon rating on concerns over growth, Frontier acquisition

Investing.com -- KeyBanc Capital Markets analysts cut their rating on Verizon (NYSE: VZ) shares to Sector Weight from Overweight after the telecommunications company reported quarterly results below expectations.

The firm cited several reasons for the revision, including limited potential for EBITDA growth acceleration in 2025, potential negative impacts from Verizon's potential acquisition of Frontier Communications (OTC: FTRCQ) Parent Inc (NASDAQ: FYBR), and slowing improvements in Verizon Consumer Group's postpaid phone net additions coupled with higher device subsidies.

“We will look for a pullback in valuation and/or upside to expectations to become more constructive,” KeyBanc analysts said in a note.

Verizon has maintained its guidance for 2024, projecting 2.0-3.5% year-over-year growth in total Wireless service revenue and 1.0-3.0% growth in adjusted EBITDA. The company also expects to meet or exceed the midpoint of these projections and has kept its capital spending guidance for 2024 steady at $17.0 billion to $17.5 billion.

Despite these projections, KeyBanc anticipates a deceleration in wireless service revenue growth and only about 2% EBITDA growth going into 2025. They also predict free cash flow (FCF) to decline to less than $18 billion due to expected capital spending of approximately $18 billion and potentially higher cash taxes.

“We think in order for the stock to appreciate further, EBITDA growth would need to accelerate toward 3%+, capex would need to be the low end of the range, and cash taxes would need corporate tax rate changes,” analysts added.

They adjusted their estimates for the stock, resulting in a decrease of 0.4% to 1.2% for 2024/2025 adjusted EBITDA and a significant divergence in FCF estimates, showing an increase of 7.9% for 2024 but a decrease of 7.9% for 2025.

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