Bear markets present investors with outstanding value opportunites. As value investor Shelby Collum Davis, founder of Davis Funds, once observed, "You make most of your money in a bear market, you just don’t realize it at the time."
One such value opportunity to emerge from the current bear market is Verizon Communications Inc. (VZ, Financial), the telecommunication company that shares the U.S. wireless market with AT&T Inc. (T, Financial) and T-Mobile US Inc. (TMUS, Financial). This rule of three in the telecom market creates a stable structure for relatively rational pricing. Everyone makes money, but not so much money that the government steps in to break the company up (like the threat now facing Alphabet (GOOG)(GOOGL), which is reaching monopoly status).
Trading near a 10-year low, the company's stock has fallen off even more than the S&P 500 in this bear market. I find this a strange as Verizon is, arguably, a safe stock with a low price-earnings ratio, high dividend yield and good financial conditions. It should also have low volatility.
Verizon also sells an essential service. After food, clothing and shelter, a means to quick communication may now be the fourth most essential need.
A brief company history
Verizon traces its history back to 1877, when Alexander Graham Bell, the inventor of the telephone, and his father-in-law formed the Bell Telephone Co. in Boston, which eventually evolved into the old AT&T (called Ma Bell) before it was broken up.
The company we know today was created on June 30, 2000 by the combination of two "Baby Bells," Bell Atlantic Corp. and GTE Corp., in one of the largest mergers in U.S. business history. GTE and Bell Atlantic themselves evolved and grew through decades of mergers, acquisitions and divestitures. In 2014, Verizon then bought out the 45% indirect interest in Verizon Wireless from Vodaphone PLC (VOD) in a transaction valued at approximately $130 billion to assume full ownership.
Business overview
The main battleground within the telecom arena is the wireless market and within that, the premier 5G broadband wireless connectivity. Verizon, at one time, was the clear leader in the telecom market, but is now in a closely fought horse race with T-Mobile and AT&T. T-Mobile (which combined with Sprint in 2020) is now in the lead with a newer 5G network, while a newly refocused and resurgent AT&T is in second place. It appears Verizon has some catching up to do.
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Source: Businesswire
Verizon's business is capital intensive. The biggest investment is in licensing spectrum from the the Federal Communications Commission, which auctions off spectrum to wireless telecom companies for an extended period of time (usually 10 to 15 years). Companies then use the licensed spectrum to offer wireless access to its customers. The licenses have continually renewed before expiry.
Like most telecom companies, Verizon carries a lot of debt, but carrying it does not appear to be much of an issue. The debt-to-adjusted Ebitda ratio is 2.5, which is pretty good.
Additionally, Verizon's return on invested capital has been consistently superior to its weighted average cost of capital, thus showing the company is creating value as it grows.
The company also maintains wireline infrastructure, but this business is fairly small and mainly supports the wireless business by carrying backhaul data traffic from cellular towers to its data processing nodes. Leveraging its wireless capabilities, Verizon has increasingly deployed fixed wireless internet technology where it brings services to homes and businesses by connecting them to the nearest cell phone tower. This helps to defray its large fixed infrastructure costs over more points of access and makes greater use of its investments in spectrum.
Fixed wireless has found its greatest success in rural areas, where the market is underserved and price sensitive.
Valuation
I think a straightforward discounted cash flow valuation using earnings per share should generate a ballpark value for Verizon. I used a starting figure of $4.77 (which is the normalized earnings per share over the last five years) and assumed a long-term growth rate of 2% and discount rate of 7%. Based on these fairly conservative assumptions, the valuation I get is around $60, which has a wide margin of safety.
Verizon pays a dividend yield of 7.07%, which is growing at about 2% a year. The dividend payout ratio is reasonable at around 50%, so there is adequate margin of safety against a reduction.
Conclusion
Investing in Verizon could be a good bet given the low price-earnings ratio of 7 and dividend yield of over 7%. The margin of safety is alsoquite comfortable. While the company has a large amount of debt, it has a huge cash flow to easily carry it.
As a result, I think Verizon has good value. The average analyst is forecasting a 12-month price target of $49 and most have a hold recommendation. 
Morningstar's recommendation is also consistent, giving the name a five-star rating and $59 fair value assessment. 
