Verizon's Free Cash Flow Struggles And Debt Challenges: Analyst Trims Expectations

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  • Oppenheimer analyst Tymothy Horan reiterated an Outperform rating on the shares of Verizon Communications Inc. VZlowering the price target to $43 from $46.
  • The company, like its peers, has increased prices slightly. It needs to focus on FCF generation to pay down enough debt to grow free cash flow, the analyst notes. Verizon's unsecured debt as of the end of first-quarter 2023 increased by $1.4 billion sequentially to $132.0 billion. The company's net unsecured debt balance increased sequentially by $1.8 billion to $129.8 billion.
  • The analyst believes FCF growth to be a key to sustaining the dividend and not entering a financial spiral of growing debt.
  • Tymothy cuts postpaid phone net adds from +500K to +223K in FY23. The company's prepaid segment is under "increased pressure" from brand rationalization, and competitive ACP offers, and higher disconnects from its SafeLink brand. 
  • In addition, stronger wireless competitors like T-Mobile US, Inc.TMUS and cheaper mobile options from cable places may put additional pressure on wireless ARPU and churn, the analyst flagged.
  • The analyst expects increasing competition to hurt Verizon's ability to grow revenue and expand EBITDA margins, coupled with intense margin pressure in the handset promotional markets. 
  • Oppenheimer reduced FY23/24 revenue each by 70bps and lowered FY23/24 EBITDA 80 bps and 110 bps, respectively, mostly on lower equipment revenue in the recently-reported 1Q23. 
  • However, the company's wireless network is set to see a 4x-plus increase in capacity in 2024, which should allow it to continue to grow fixed wireless subs above Street estimates.
  • Price Action: VZ shares traded lower by 1.15% at $36.87 on the last check Wednesday.
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