Verizon Valuation Pitfall: Look Beyond Low P/E

23 days ago

Speaker

"Now, the first one is Verizon, which is a stock with no growth. The biggest mistake you could say investors make with stocks like Verizon, and I get it all the time. They tell me, 'Look at Verizon. They're trading at eight times earnings. Eight times earnings is dirt cheap for a stock like Verizon. Or look at the other stock. It's trading at six or seven times free cash flow. Verizon is trading at eight times free cash flow. Therefore, Verizon is extremely extremely undervalued.' This is the most common trap you could fall into. The mistake here is that you're looking at price to free cash flow or price to earnings ratio. But some companies have debt. If you want to buy the whole company, you also have to assume the debt. Enterprise value for Verizon is $331 billion while the market cap is $168 billion. So the PE is not really eight times; it's more like 16 or 17 times."

The speaker cautions investors against relying solely on low P/E or price-to-free-cash-flow metrics for Verizon, emphasizing that ignoring the company's debt leads to a misvaluation. By considering enterprise value—where Verizon's actual PE is closer to 16-17 times—the seemingly attractive dividend yield and low multiple may be misleading.

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