Shares of Verizon (VZ) have been under pressure since a series of Wall Street Journal articles on legacy lead-sheathed phone lines, most abandoned, leaching the toxic metal into soil and water.
With the potential of multi-billion-dollar clean-up costs and litigation in mind, Wall Street took a shoot-first, ask-questions-later approach to Verizon, AT&T (T) , and several other regional operators descended from Baby Bells.
When there's difficulty in getting one's arms around potential open-ended liability, it's completely reasonable for investors to jettison or avoid a stock.
I believed 3M (MMM) fell into the category with PFAS contamination when I cautioned about the stock a year ago. Although 3M has made progress in qualifying its liabilities in recent PFAS settlements, with estimates that 45% of drinking water in the United States is contaminated with PFAS, avoiding the shares continues to be prudent, in my view. But, in the case of Verizon, lead-related clean-up and liability seem far more limited, contained, and manageable.
Verizon and AT&T have been vast underperformers in recent years, removing any barrier for unloading the shares at the first sign of trouble -- VZ is down 33% over the last year and 8% since the WSJ's lead-exposure story.
With VZ down over $12 billion in market cap since the WSJ investigation, portfolio managers are dumping the stock at discounted levels, which has created an attractive entry for contrarian investors willing to buy a scuffed-up bargain.
VZ trades at a P/E of 7, reflecting growth challenges in the highly competitive cellular industry. The promise of 5G may have been overhyped to investors in the short run; nonetheless, the sector is still one of life's necessities and a solid cash flow generator. Verizon anticipates $18 billion in cash flow, 60% directed to annual dividend payments of $11 billion.
With Tuesday's earnings in focus, Bank of America recently met with management and believes Verizon will post a solid quarter and reiterate full-year guidance. I'd expect some rebuttal to Wall Street's concerns about potential liability and costs to remediate any lead contamination. Verizon has been doing its own site testing of locations the WSJ noted, and will likely have preliminary updates.
Morgan Stanley analyst Simon Flannery has been surprised by how much Wall Street punished Verizon in market cap relative to AT&T since Verizon has much less wireline exposure. He notes that Verizon has about a third of the landline footprint passes of ~20M locations compared to 60M+ locations passed by AT&T. Plus, Verizon is much further along in upgrading its wireline to fiber.
Raymond James thinks Wall Street is overestimating the remediation costs, likely spread over many years. Perhaps a stretch, but the firm mentions the scrap value of copper at $3/pound and lead at $1.15/pound, which may offset some clean-up costs.
An overhang on Verizon stock from lead-sheathing contamination worries will be ongoing, but the initial concerns will likely prove to be over-blown as more clarity emerges.
Verizon's earnings report on Tuesday will be a first step toward addressing investor concerns and potentially reversing the recent adverse stock action. With a 7.7% dividend yield and 7 P/E, much negative sentiment and news is already baked in, making VZ a good contrarian buy.