Keybanc Captial Markets analyst Brandon Nispel downgraded Verizon Communications Inc (NYSE:VZ) stock from Overweight to Sector Weight.

Nispel rerated and reduced his estimates following weaker-than-expected results. While the analyst's prior outlook largely remains, he adjusted his rating based on limited EBITDA growth potential for 2025 (projected at 1.5% compared to 2.2% in 2024) and a likely decline in free cash flow (expected to fall to $17.5 billion in 2025 from $20.2 billion in 2024).

Verizon's potential acquisition of Frontier Communications Parent, Inc (NASDAQ:FYBR), which he noted as a poor capital allocation decision, and slowing improvements in postpaid phone net additions combined with higher device subsidies, indicated higher costs for the same growth.

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Nispel expects limited EBITDA acceleration in 2025, barring significant price adjustments. Free cash flow is expected to decline to $17.5 billion due to increased capital expenditures (with 2025 guidance at around $18 billion) and higher cash taxes, with minimal offsets from lower interest expenses or restructuring efforts.

The analyst noted Verizon's acquisition of Frontier Communications will restrict its ability to repurchase shares in the near term, which could otherwise generate a 6%+ yield. He considered share repurchases a better capital allocation strategy than the Frontier Communications deal, which he expects offers a 6% internal rate of return but carries more risk.

While Verizon is shifting from negative to positive postpaid phone net additions, device subsidies have increased, suggesting that the cost of growth is rising, Nispel said.

Verizon maintained its 2024 guidance of 2.0%-3.5% year-over-year wireless service revenue growth and 1.0%-3.0% adjusted EBITDA growth, expecting results to hit or exceed the midpoints. Capital spending guidance remains $17.0 billion-$17.5 billion. For 2025, the analyst expects decelerating wireless revenue growth, lower EBITDA growth of around 2% and declining free cash flow due to higher capital spending and taxes.

The analyst's fair value of $42 reflects a multiple of 6.5 times his 2025 adjusted EBITDA estimates, compared to industry averages of 6.4 times for cable companies and 7.4 times for telecoms.

Nispel expects fourth-quarter revenue of $35.36 billion and EBITDA of $11.98 billion. The analyst expects fiscal 2024 revenue of $134.47 billion and EBITDA of $48.85 billion. He projects fiscal 2025 revenue of $136.36 billion and EBITDA of $49.6 billion.

Verizon stock lost close to 5% in the last five days.

Price action: VZ stock is down 2.48% at $41.80 at publication on Thursday.

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