Deutsche Bank Sees Verizon To Report Lower-Than-Expected EPS For 'Messy' Q2

Deutsche Bank expects Verizon Communications Inc. (NYSE: VZ)'s second-quarter earnings to fare below consensus expectations amid weak wireline business, strike and slower uptake of handset installment plans.

The brokerage expects Verizon to report second-quarter adjusted EPS of $0.91 versus consensus of $0.95 when the carrier announces its financial results on July 26.

"While negative Wireline customer net adds and mid-teens margins this quarter are messy, they should be transitory. More importantly, we see downside to 2016 EPS guidance/consensus (and believe 2017 carries greater risk as well)," analyst Matthew Niknam wrote in a note.

Although the strike is likely to impact quarterly results, the company is also likely to benefit from penetration gains in the Boston, New York region. That said, the analyst noted that higher operating costs, primarily strike-related, should push segment margins to 15 percent.

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Meanwhile, Niknam said one of the most surprising data points post first quarter was the gap between existing business and pro forma margins (400–500bp). However, given the lower margin base, pro forma EBITDA growth has been in the low-to mid-single digits (vs. flattish year-over-year prior).

"Looking forward, we expect VZ to exit 2016 in the low-20 percent area (19 percent in 1Q16), with margin expansion next year (even with this assumed ramp, our 2016E EPS of $3.82 is still below consensus and implied guidance)," Niknam highlighted.

Despite acknowledging high-quality network assets, FCF generation and a 4 percent dividend yield as positives, the analyst remains Hold-rated on the stock given cautious view on core trends and higher execution risks related to new initiatives.

"Net net, we believe profitability improvements are one of the key necessities behind a return to 'normalized' (mid-single digit) EPS growth in 2017," the analyst added.

At the time of writing, shares of Verizon were down 0.31 percent to $55.83. The analyst has a price target of $52 on the stock.

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