Does Verizon Communications Inc.’s (NYSE:VZ) P/E Ratio Signal A Buying Opportunity?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to Verizon Communications Inc.’s (NYSE:VZ), to help you decide if the stock is worth further research. Based on the last twelve months, Verizon Communications’s P/E ratio is 15.59. That is equivalent to an earnings yield of about 6.4%.

See our latest analysis for Verizon Communications

How Do I Calculate Verizon Communications’s Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Verizon Communications:

P/E of 15.59 = USD60.70 ÷ USD3.89 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does Verizon Communications Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (16.6) for companies in the telecom industry is roughly the same as Verizon Communications’s P/E.

NYSE:VZ Price Estimation Relative to Market, January 29th 2020
NYSE:VZ Price Estimation Relative to Market, January 29th 2020

That indicates that the market expects Verizon Communications will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Verizon Communications shrunk earnings per share by 50% over the last year. But over the longer term (3 years), earnings per share have increased by 4.2%. And EPS is down 3.4% a year, over the last 5 years. This could justify a pessimistic P/E.

Remember: P/E Ratios Don’t Consider The Balance Sheet

The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Verizon Communications’s Balance Sheet

Net debt is 42% of Verizon Communications’s market cap. While that’s enough to warrant consideration, it doesn’t really concern us.

The Verdict On Verizon Communications’s P/E Ratio

Verizon Communications has a P/E of 15.6. That’s below the average in the US market, which is 18.6. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Verizon Communications. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.