Verizon Communications Inc. (VZ, Financial) and Atlas Air Worldwide Holdings Inc. (AAWW, Financial) have underperformed the broader market recently. They are also in financial distress, as represented by low Altman Z-Scores, meaning that they could go bankrupt within the next couple of years.
Nonetheless, their ability to generate profits seems to be very good, as signaled by GuruFocus profitability ratings of at least 7 out of 10. These stocks also received positive recommendation ratings on Wall Street, which means sell-side analysts believe these companies have the potential to continue growing their stock prices, though investors should be on guard in case things start to get worse.
Verizon Communications Inc.
The first stock to consider is Verizon Communications Inc. (VZ, Financial), a New York-based telecommunications company that operates globally. The consumer segment had about 115 million wireless retail connections, about 7 million wired broadband connections and about 4 million FiOS (Fiber Optic Service) video connections at the end of 2021. The business segment had approximately 27 million wireless postpaid retail connections and approximately 477,000 wired broadband connections.
The stock has declined 12% year to date, underperforming the Dow Jones Industrial Average (^DJI, Financial) by nearly 2%, for a market capitalization of $193.98 billion and a 52-week range of $43.76 to $56.25.
An Altman Z-Score of 1.30 combined with a debt-to-equity ratio of 2.04 versus the industry median of 0.63 suggests the company is experiencing financial stress, which implies a risk of bankruptcy.
However, despite the high financial burden, the company can pay the interest expenses due on its debt for the time being thanks to very profitable business activities. GuruFocus has assigned a rating of 7 out of 10 to the company's profitability, driven by an operating margin of 23.72% versus the industry median of 9.63% and a return on equity (ROE) ratio of 25.85% versus the industry median of 8.68%.
Verizon Communications Inc. currently pays a quarterly dividend of 64 cents per common share, with Aug. 1 being the date of its next payment. As of July 31, the trailing 12-month and forward dividend yields were both 5.54%.
On Wall Street, the stock has a median recommendation rating of hold. Sell-side analysts have established an average target price of $52.25 per share, which represents a 13.12% upside from Friday’s closing price of $46.19 per share.
In the second quarter of 2022, Verizon posted adjusted earnings per share (EPS) of $1.31, compared to $1.37 in the year-ago quarter, missing analysts' median estimate by $0.01. The decline was due to the sale of some assets and higher ad spending for wireless activation. In addition, adjusted net income was impacted by declining wireline revenues and inflationary cost pressure.
Revenue came in at $33.8 billion, flat year over year but in line with analysts' median forecast. The decline in the wireline business and M&A activity in 2021 didn't help drive higher revenue year-over-year.
Verizon revised its full-year 2022 guidance for wireless service revenue growth to 8.5% to 9.5% from a prior 9% to 10% and adjusted Ebitda growth to a range of -1.5% to 0% from a prior 2% to 3%. Adjusted earnings per share are now expected to be between $5.10 and $5.25, lower than the previous target range of $5.40 to $5.55.
Atlas Air Worldwide Holdings Inc.
The second stock to consider is Atlas Air Worldwide Holdings Inc. (AAWW, Financial), a Purchase, New York-based provider of outsourced cargo and passenger aircraft operating solutions and charter services to various organizations including the U.S. military. The company also serves airlines, express delivery carriers and e-commerce retailers. The company has operating activities in the Americas and internationally.
The stock has dropped 20.15% since the beginning of 2022, underperforming the Dow Jones Industrial Average (^DJI, Financial) by nearly 10%, for a market capitalization of $2.13 billion and a 52-week range of $58.70 to $97.13.
An Altman Z-Score of 1.85 combined with a debt-to-equity ratio of 0.88 versus the industry median of 0.63 suggests the company is in some kind of financial distress. While it can afford to make interest payments on its debt for the time being, as evidenced by an interest coverage ratio of 8.06, the possibility of bankruptcy within a few years cannot be ruled out completely.
However, operations remain highly profitable, as evidenced by a GuruFocus profitability rank of 8 out of 10. This stems from an operating margin of 17.23% versus the industry median of 6.34% and a return on equity (ROE) ratio of 18.54% versus the industry median of 7.67%.
The company does not pay dividends.
On Wall Street, the stock has a median recommendation rating of overweight. Sell-side analysts have established an average target price of $93 per share, which represents a 22.84% upside from Friday’s closing price of $75.71 per share.
For the first quarter of 2022, Atlas Air Worldwide reported adjusted earnings per share of $2.99, beating the median consensus by $0.36, on revenue of $1.04 billion. Revenue rose 21% year over year in the quarter as a result of an increase in the demand for the company's airline services.
President and CEO John W. Dietrich, said that the company's long-term growth strategy is to increase the number of flights with long-term contracts that feature attractive fares and guaranteed service. Dietrich also said Atlas Air Worldwide was adding four new 747-8F (a wide-body aircraft developed by Boeing (BA, Financial) and four new 777 freighters (an efficient, high-capacity, long-haul freighter aircraft) to its fleet.
For the full year, the company expects more than 350,000 block flight hours, resulting in an expected 14.1% year-over-year increase in revenue to approximately $4.6 billion (analyst consensus estimates call for revenue of $4.59 billion). The adjusted Ebitda is expected to be around $1 billion. In addition, the company expects core aircraft spending to fluctuate between $135 million and $145 million, primarily for parts and components of its fleet.
