Morgan Stanley upgrades Verizon, cites favorable risk-reward outlook after stock's underperformance

Published Thu, Dec 15 20225:50 AM ESTUpdated Thu, Dec 15 20227:12 AM EST

The risk-reward outlook for Verizon 's stock looks favorable after underperforming its telecom peers this year, according to Morgan Stanley. Analyst Simon Flannery upgraded the stock to overweight in a note to clients Thursday, saying that the company offers a defensive business mix for a slowing macro period. In a separate note to clients, he downgraded shares of AT & T to equal weight from overweight, citing the stock's strong performance in 2022. "Following significant underperformance in '22, VZ trades at a historically attractive valuation on an absolute and relative basis," Flannery wrote. "We see room for improved operational performance in '23 and FCF ramping 45% by '24." Shares of Verizon have tumbled 28% this year. By comparison, T-Mobile and AT & T are up about 23% and 2%, respectively. Along with the upgrade, Flannery increased the bank's price target to $44 a share, implying a more than 17% upside from Wednesday's close. "We think the underperformance this year has been driven in part by weak [key performance indicators], negative earnings revisions, and concerns around intensifying wireless competition," Flannery. "However, we believe that at current levels, the stock is now discounting an overly negative relative outlook and see signs that trends are gradually improving." Another strength for Verizon is its solid dividend yield at roughly 7%, which it continues to increase. This should offer downside protection for the stock, trading higher than both the yield on the 10-year Treasury note and AT & T's dividend, he said. At a forward price-to-earnings ratio of more than 7 times, the stock also trades at a 60% discount to the S & P 500, Flannery noted. Limited exposure to areas like pay TV should also enable Verizon to defend itself in a slowdown, he added. Meanwhile, AT & T's outperformance this year, and slowing growth in 2023, create a more balanced risk-reward for the stock going forward, according to Morgan Stanley. "At current levels, the stock remains inexpensive on some valuation measures and could hold up well in a choppy market environment, but we expect 2023 to be another year of heavy investment, while strong KPI momentum could be more difficult to sustain as the wireless industry matures," Flannery wrote. The bank's $20 price target implies a 6% upside for the stock. Shares fell more than 1% before the bell. — CNBC's Michael Bloom contributed reporting