One of the companies mentioned in this week’s Globe and Mail article where we focused on 2 non-cyclical US sectors, namely, Utilities and Telecommunications, will be covered in more details below.
Verizon’s Communications (VZ)
As we can see from the Scorecard, Verizon possesses a Positive Fundamental Outlook and an attractive SPscore of 63%, where the Performance score is in the green shaded area, whereas the Risk score is very close to the yellow shaded area- representing a medium risk for the company.
The 6% decline in score marked below the SPscore, is either due to a fall in performance or a rise in risk since last quarter.
We know that the Risk score is affected by 2 main metrics which are the Price over Intrinsic Value and the Future Growth Value.
On the scorecard, we can see from the FGV graph that while the stock is still trading at a discount, the discount has decreased over the recent quarters. Therefore, increasing the risk slightly.
As for the Performance, we look at the EVA graph, EVA seems to have suffered tremendously just by looking at the graph below. That is actually not the case if we take a deeper look at the numbers.
Due to the tax cuts that took place in 2017, the EVA was artificially inflated. Verizon and many companies benefitted when their profits were boosted due to the cut. That effect, however, was reversed back to normal in December 2018 when the real taxes were reported and thus creating the sharp fall in EVA seen on the previous graph.
This correction shows a negative change in NOPAT from 2017 to 2018 by more than $10 billion, ultimately leading to a deeper plunge in EVA. In this case, we should compare current EVA to that in Dec 2016 to get a more accurate view of whether this company’s performance improved or deteriorated. (It improved in the case of Verizon)