Peter stopped by my office today to discuss how to analyze Verizon given a number of issues. I thought it would be beneficial for everyone to see what those issues are and possible resolutions.
1. Data discrepancies
There is a lot of free financial data out there (e.g., Yahoo Finance, Google Finance, Morningstar, Zacks, etc.). There are also a couple fee-based sources paid by CSUS (Valueline and Mergentonline). With Verizon, the EPS number varied from website to website. So what is the right number?
The “trump” card is always the actual 10K filing with the SEC.
Quarterly filings are unaudited. Annual filings are audited. The best place to obtain the entire filing for free in a downloadable format is the company’s website. For example, Verizon’s latest 10K is available here: http://www22.verizon.com/investor/secfiling.htm
2. Stock analysis
I put together the DuPont/Ratio Analysis (DRA) spreadsheet about a year ago. This semester I introduced the Graham-Buffet (GB) spreadsheet. During that introduction I said, but perhaps not emphasized, that I feel the GB intrinsic value estimate is more Occam’s Razor compliant than any of the three models in the ratio analysis sheet. In other words, I would not put too much emphasis on the intrinsic value models from the DRA sheet.
Use the DRA sheet to assess profitability, asset management, and debt relative to competitors. Use GB to assess intrinsic value.
If you see strange growth rate numbers with the GB sheet double-check the formulas and inputs with the growth rate presentation on my website.
3. Analysts estimates
While on the topic of growth rates, analyst estimates may be informative. As I said before, a major part of your stock analysis value add will be determining and justifying the growth rate. The GB sheet will provide estimates based on historical book value growth (LOGEST) and company financials (IGR/SGR). Those will undoubtedly produce different numbers. You should also take analyst growth rate estimates into consideration as well. You may obtain such estimates from Yahoo finance.
For example, you will note the analyst estimate for Verizon’s five year growth is 8%. That number should be woven into your choice of g. Maybe average LOGEST, IGR, SGR, and analyst estimates. Maybe apply qualitative information and choose the analyst estimate over IGR. Maybe ignore the analyst estimate given your SWOT analysis.
In sum, at least consider the analysts estimate for g then tell us how it does or does not work into your choice for g.
4. The Mosaic of Analysis in general
Verizon has performed very well in the short term. However it fails the GB vigilant management measures, has a declining book value, has a Price-to-Book of 4.50 (mrq), and over the last few years paid out 2-6 times earnings in dividends. The declining book value is no surprise when you pay 2.03 per share in dividends after earning just 0.31.
Verizon did not pass the screen last semester and it doesn’t pass now.
Here is where I humbly admit I do not know why the stock has performed so well in the short run (past 6 months).
Is stock screening and GB meaningless? Should we do the opposite of what the GB sheet suggests?
I would argue the answer of both questions is no. Screening, GB, and DRA should be part of the Mosaic of Analysis. So should SWOT, Porter’s five forces, and other qualitative analyses. I believe in the long term the fruits of that analysis will be seen. In the short run we are subject to “the changing moods and measurements of the stock market”.
Finally, I agree with Peter that we should at least trim some of Verizon.
Hope this helps…
 Intelligent Investor, Benjamin Graham