S&P Telecom Services Sector
STOCK PRESENTATION
Pravin Talreja
Agenda
1.
2.
3.
4.
5.
6.
Sector Review
Stock Recommendation
Verizon
AT&T
T-Mobile
Summary
Agenda
1.
2.
3.
4.
5.
6.
Sector Review
Stock Recommendation
Verizon
AT&T
T-Mobile
Summary
Sector Size: S&P 500 and SIM
• Total Telecommunication Sector Market Cap: $1.8 trillion
• S5TELS Market Cap: $416.4 billion = 2.27% of S&P 500
• The only telecom holding: VZ @ $279.7 thousand = 2.77% of
SIM – overweight by 0.50%
SIM
S&P 500
Utilities, 2.82%
Telecom, Materials,
3.13%
2.27%
Energy, 7.78%
Consumer
Staples, 9.43%
Industrials,
10.09%
Info Tech,
19.63%
Financials,
16.63%
Health Care,
15.42%
Utilities, Telecom, Materials,
2.77%
2.16%
2.89%
Receivables,
Cash, 3.06%
0.07%
Energy,
7.10%
Info Tech,
Consumer
20.01%
Staples,
Financials,
8.07%
17.10%
Health
Industrials,
9.06%
Consumer
Discretionary,
12.80%
Consumer
Discretionary,
12.14%
Care,
15.56%
UPDATED Sector Size: S&P 500 and SIM
• DirecTV bought out by AT&T – now a subsidiary
SIM
Utilities, Telecom, Materials,
2.77%
2.16%
2.89%
Receivables,
Cash, 3.06%
0.07%
Energy,
7.10%
Info Tech,
Consumer
20.01%
Staples,
Financials,
8.07%
17.10%
Health
Care,
15.56%
Industrials,
9.06%
Consumer
Discretionary,
12.14%
SIM - Post DTV Deal
Cash, 3.74%
Utilities, Materials,
2.89% 2.16% Receivables,
0.07%
Telecom,
4.57%
Energy, 7.10%
Info Tech,
20.01%
Consumer
Staples,
8.07%
Financials,
17.10%
Health Care,
15.56%
Industrials,
9.06%
Consumer
Discretionary,
9.66%
Sector Weight Recommendation
Equal Weight
Reduce SIM weight to equal S&P 500 = 2.27%
• Highly contested market; aggressive tactics by competitors
• Interest rates still expected to go higher:
– Already lowered expectations at last meeting
– China and Greece remain a concern
• High leverage could impose strain on cash available for capital
expenditures (especially coupled with increasing interest rates)
• IoT provides an exciting opportunity for market expansion (connected
cars on the rise)
• Stable dividends provide support for prices, given modest economic
recovery
Agenda
1.
2.
3.
4.
5.
6.
Sector Review
Stock Recommendation
Verizon
AT&T
T-Mobile
Summary
Stock Recommendation
• DirecTV: HOLD (Converts to AT&T = 1.80% of
SIM)
• Verizon: SELL
• AT&T: BUY (to max SIM weight of 2.27%)
• T-Mobile: Review opportunity but leave out
Wireless Wars: T vs. VZ
• It’s all about content!
• Regulatory Environment favors content companies (NFLX, GOOG, etc.)
T
VZ
•
Unified content bundle regardless of
platform
•
Maintain Wireless Network as source
of competitive advantage
•
Diversify internationally
•
Double down on Wireless
•
Leverage DirecTV subscriber base for
broadband and wireless products
(Quad Play)
•
AOL acquisition was strategic:
Negotiating power with media content
providers
•
•
–
–
Ad-Tech
Content delivered through mobile
Diversify into mobile advertising
revenues
Agenda
1.
2.
3.
4.
5.
6.
Sector Review
Stock Recommendation
Verizon
AT&T
T-Mobile
Summary
Verizon Snapshot
•
Verizon Communications, LLC offers
voice, data, and video services and
solutions on its wireless and wireline
networks.
•
Two business segments:
–
–
Wireless
Wireline
•
Q2 2015 earnings beat consensus, but
revenue, owing to increased
competition and market saturation
•
Lowered revenue guidance for 2015
•
Recent Relevant news: AOL
Acquisition
Key Statistics
Industry
Sector
Current Price (7/24/2015)
52-week Price Range
Average Daily Volume
Market Cap (7/24/2015)
Enterprise Value
P/E (TTM)
Est. P/E (CY)
Dividend Yield
Share Outstanding
Telecom Sector
Diversified Telecom
$46.04
$45.09 - $52.15
15.027 million
$187.77 billion
$298.55 billion
12.58
11.78
4.78%
3.981 billion
Verizon Operating Metrics
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
•
Revenue growth has been
primarily due to strong
connections growth in
wireless
•
Wireline is in decline –
endemic to the industry
•
However, ARPA has
started to decline after
resistance to competitive
pressures
•
Post-paid connections per
account on rise as tablet
connections drive growth
(less profitable than
smartphone, but stickier
business)
130000
125000
120000
115000
Wireless
110000
Wireline
105000
TOTAL
100000
95000
2010
2011
2012
2013
2014
$165
3.25
3.15
3.05
2.95
2.85
2.75
2.65
2.55
2.45
2.35
2.25
$160
$155
$150
$145
$140
$135
$130
$125
$120
'10
'11
'12
'13
'14
Q2 '15
Retail postpaid
ARPA
Retail postpaid
connections
per account
Verizon: AOL Acquisition
•
Verizon purchased AOL for $4.4 billion in an allcash deal
•
2015 AOL revenue expected to be $2.7 billion
•
However, AOL’s ad-tech appears to be motivation
•
US Mobile ad spend: Est. $28 billion in 2015
•
Recent win: Microsoft 10-yr agreement
•
AOL revenue grew by 9% in 2014 and expected
to grow 8% in 2015
–
16% growth in Third Part Properties – premium properties,
including video
Verizon: DCF
Analyst: Pravin Talreja
7/24/2015
Year
Terminal
Disc. Rate =
8.5%
Terminal
FCF Growth =
1.5%
2015E
2016E
2017E
2018E
2019E
2020E
2021E
20122E
2023E
2024E
2025E
130,877
2.99%
132,898
1.5%
133,112
0.2%
133,778
0.5%
134,580
0.6%
135,522
0.7%
136,878
1.0%
138,520
1.2%
140,459
1.4%
142,566
1.5%
144,705
1.5%
EBT
EBT Margin
20,214
15.4%
21,264
16.0%
20,923
15.7%
20,334
15.2%
20,187
15.0%
20,057
14.8%
19,847
14.5%
20,085
14.5%
20,367
14.5%
20,672
14.5%
20,982
14.5%
Taxes
Tax Rate
4,649
23.0%
4,891
23.0%
4,812
23.0%
4,677
23.0%
4,643
23.0%
4,613
23.0%
4,565
23.0%
4,620
23.0%
4,684
23.0%
4,755
23.0%
4,826
23.0%
Net Income
% Growth
15,565
16,373
5.2%
16,111
-1.6%
15,657
-2.8%
15,544
-0.7%
15,444
-0.6%
15,282
-1.0%
15,466
1.2%
15,682
1.4%
15,918
1.5%
16,156
1.5%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
16,300
12.5%
(23)
0.0%
16,500
12.6%
16,600
12.5%
(42)
0.0%
16,800
12.6%
16,900
12.7%
(64)
0.0%
17,000
12.8%
17,124
12.8%
(67)
-0.1%
17,124
12.8%
17,092
12.7%
(67)
-0.1%
17,092
12.7%
17,211
12.7%
(68)
-0.1%
17,211
12.7%
17,247
12.6%
(68)
-0.1%
17,247
12.6%
17,315
12.5%
(69)
-0.1%
17,315
12.5%
17,276
12.3%
(70)
-0.1%
17,276
12.3%
17,393
12.2%
(71)
-0.1%
17,393
12.2%
17,365
12.0%
(72)
-0.1%
17,365
12.0%
Free Cash Flow
% Growth
15,341
16,131
5.1%
15,947
-1.1%
15,590
-2.2%
15,477
-0.7%
15,376
-0.6%
15,214
-1.1%
15,397
1.2%
15,612
1.4%
15,846
1.5%
16,084
1.5%
Terminal
Value
233,217
Free Cash
Yield
6.90%
Terminal P/E
14.4
Revenue
% Growth
NPV of Cash Flows
102,883
50%
NPV of terminal value
Projected Equity Value
103,148
206,031
50%
100%
Free Cash Flow Yield
8.37%
Current P/E
Projected P/E
11.8
13.2
11.2
12.6
11.4
12.8
Current EV/EBITDA
Projected EV/EBITDA
6.9
7.4
6.8
7.4
6.8
7.3
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
Cash/share
Terminal
EV/EBITDA
3,981.0
$
$
46.04
51.75
12.4%
113,271
10,598
2.66
$
51.83
Consensus Target Price
8.8
AOL: DCF
Analyst: Pravin Talreja
7/24/2015
Year
Terminal
Disc. Rate =
10.50%
Terminal
FCF Growth =
4.5%
2015E
2016E
2017E
2018E
2019E
2020E
2021E
20122E
2023E
2024E
2025E
Revenue
% Growth
2,724
2,868
5.3%
3,006
4.8%
3,150
4.8%
3,301
4.8%
3,460
4.8%
3,626
4.8%
3,800
4.8%
3,979
4.7%
4,166
4.7%
4,357
4.6%
EBT
EBT Margin
224
8.2%
257
9.0%
295
9.8%
315
10.0%
330
10.0%
346
10.0%
363
10.0%
380
10.0%
398
10.0%
417
10.0%
436
10.0%
56
25.0%
64
25.0%
74
25.0%
79
25.0%
83
25.0%
86
25.0%
91
25.0%
95
25.0%
99
25.0%
104
25.0%
109
25.0%
171
196
14.9%
225
14.9%
236
4.8%
248
4.8%
259
4.8%
272
4.8%
285
4.8%
298
4.7%
312
4.7%
327
4.6%
65
2.4%
(42)
-1.6%
76
2.8%
67
2.3%
(29)
-1.0%
75
2.6%
69
2.3%
(28)
-0.9%
75
2.5%
72
2.3%
(32)
-1.0%
76
2.4%
76
2.3%
(33)
-1.0%
76
2.3%
76
2.2%
(35)
-1.0%
76
2.2%
76
2.1%
(36)
-1.0%
76
2.1%
76
2.0%
(38)
-1.0%
76
2.0%
76
1.9%
(40)
-1.0%
76
1.9%
75
1.8%
(42)
-1.0%
75
1.8%
78
1.8%
(44)
-1.0%
78
1.8%
117
159
36.1%
191
19.9%
202
5.5%
215
6.4%
225
4.8%
236
4.8%
247
4.8%
259
4.7%
271
4.7%
283
4.6%
Terminal
Value
4,933
Free Cash
Yield
5.74%
Terminal P/E
15.1
Taxes
Tax Rate
Net Income
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
% Growth
NPV of Cash Flows
1,314
42%
NPV of terminal value
Projected Equity Value
1,817
3,131
58%
100%
Free Cash Flow Yield
2.82%
Current P/E
Projected P/E
24.3
18.3
21.2
16.0
18.4
13.9
Current EV/EBITDA
Projected EV/EBITDA
13.7
10.2
12.2
9.1
10.9
8.1
Shares Outstanding
83.0
VZ Offered Price
Implied equity value/share
Premium
Debt
Cash
Cash/share
$
$
50.00
37.73
32.5%
307
489
5.89
AOL price on May 7 was $39.39 (premium of 27%)
Terminal
EV/EBITDA
9.2
VZ Combined: DCF
Analyst: Pravin Talreja
7/24/2015
Year
Terminal
Disc. Rate =
8.75%
Terminal
FCF Growth =
1.75%
2015E
2016E
2017E
2018E
2019E
2020E
2021E
20122E
2023E
2024E
2025E
133,601
135,766
1.6%
136,118
0.3%
136,928
0.6%
137,882
0.7%
138,982
0.8%
140,503
1.1%
142,320
1.3%
144,438
1.5%
146,732
1.6%
149,062
1.6%
EBT
EBT Margin
20,438
15.3%
21,521
15.9%
21,219
15.6%
20,649
15.1%
20,517
14.9%
20,403
14.7%
20,210
14.4%
20,465
14.4%
20,764
14.4%
21,089
14.4%
21,418
14.4%
Taxes
Tax Rate
4,705
23.0%
4,955
23.0%
4,886
23.0%
4,756
23.0%
4,726
23.0%
4,700
23.0%
4,656
23.0%
4,715
23.0%
4,784
23.0%
4,859
23.0%
4,935
23.0%
Net Income
% Growth
15,736
16,569
5.3%
16,336
-1.4%
15,894
-2.7%
15,792
-0.6%
15,704
-0.6%
15,554
-1.0%
15,751
1.3%
15,981
1.5%
16,230
1.6%
16,483
1.6%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
16,365
12.2%
(66)
0.0%
16,576
12.4%
16,667
12.3%
(71)
-0.1%
16,875
12.4%
16,969
12.5%
(92)
-0.1%
17,075
12.5%
17,196
12.6%
(98)
-0.1%
17,199
12.6%
17,168
12.5%
(100)
-0.1%
17,168
12.5%
17,287
12.4%
(102)
-0.1%
17,287
12.4%
17,323
12.3%
(105)
-0.1%
17,323
12.3%
17,391
12.2%
(107)
-0.1%
17,391
12.2%
17,352
12.0%
(110)
-0.1%
17,352
12.0%
17,468
11.9%
(113)
-0.1%
17,468
11.9%
17,443
11.7%
(116)
-0.1%
17,443
11.7%
Free Cash Flow
% Growth
15,459
16,290
5.4%
16,138
-0.9%
15,792
-2.1%
15,691
-0.6%
15,601
-0.6%
15,450
-1.0%
15,644
1.3%
15,871
1.5%
16,117
1.6%
16,367
1.6%
Terminal
Value
237,908
Free Cash
Yield
6.88%
Terminal P/E
14.4
Revenue
% Growth
NPV of Cash Flows
103,178
50%
NPV of terminal value
Projected Equity Value
102,829
206,007
50%
100%
Free Cash Flow Yield
8.43%
Current P/E
Projected P/E
11.6
13.1
11.1
12.4
11.2
12.6
Current EV/EBITDA
Projected EV/EBITDA
7.9
8.5
7.6
8.2
7.6
8.2
Shares Outstanding
VZ Offered Price
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
Cash/share
3,981.0
$
$
46.04
51.75
12.4%
113,578
6,687
1.68
Terminal
EV/EBITDA
8.9
Verizon Combined: Sensitivity Analysis
Discount Rate
Growth Rate
$
51.75
7.50%
7.75%
8.00%
8.25%
8.50%
8.75%
9.00%
9.25%
9.50%
9.75%
10.00%
0.75%
$
57.19 $
55.16 $
53.26 $
51.50 $
49.85 $
48.30 $
46.84 $
45.47 $
44.18 $
42.96 $
41.81
1.00%
$
58.41 $
56.27 $
54.28 $
52.42 $
50.69 $
49.08 $
47.56 $
46.13 $
44.79 $
43.53 $
42.33
1.25%
$
59.73 $
57.46 $
55.36 $
53.42 $
51.60 $
49.91 $
48.32 $
46.84 $
45.44 $
44.13 $
42.89
1.50%
$
61.16 $
58.76 $
56.54 $
54.48 $
52.57 $
50.80 $
49.14 $
47.58 $
46.13 $
44.76 $
43.47
1.75%
$
62.71 $
60.16 $
57.80 $
55.63 $
53.62 $
51.75 $
50.01 $
48.38 $
46.86 $
45.43 $
44.09
2.00%
$
64.41 $
61.68 $
59.17 $
56.87 $
54.74 $
52.77 $
50.94 $
49.23 $
47.64 $
46.15 $
44.75
2.25%
$
66.26 $
63.34 $
60.66 $
58.21 $
55.96 $
53.87 $
51.94 $
50.15 $
48.48 $
46.92 $
45.46
2.50%
$
68.31 $
65.16 $
62.29 $
59.67 $
57.27 $
55.06 $
53.02 $
51.13 $
49.37 $
47.74 $
46.21
2.75%
$
70.56 $
67.16 $
64.07 $
61.26 $
58.70 $
56.35 $
54.18 $
52.19 $
50.33 $
48.61 $
47.01
Consensus Target: $51.83
Verizon Recommendation
•
My Rating: Hold
–
–
–
–
•
IoT growth
Mobile Ad sales
Stable & attractive dividend yield
Network still a competitive advantage
Recommend: SELL
–
–
–
–
AT&T presents a better investment opportunity
High leverage levels in an increasing interest rate
environment
Verizon starting to see competitive pressures
Revenue mix high on Wireless – saturated market
S&P 500
S5TELS
VZ
T
17.82
22.42
11.78
13.41
P/B
2.80
1.94
16.40
2.05
P/S
1.80
0.99
1.47
1.34
Div. Yld.
2.2%
4.8%
4.8%
5.5%
Est. PE (CY)
Agenda
1.
2.
3.
4.
5.
6.
Sector Review
Stock Recommendation
Verizon
AT&T
T-Mobile
Summary
AT&T Snapshot
•
AT&T, Inc. offers voice, data, and
video services and solutions on its
wireless and wireline networks.
•
Three business segments:
–
–
–
Wireless
Wireline
International
•
Q2 2015 earnings beat consensus and
revenue was in line
•
Strong growth in connected car
strategy (IoT)
•
Recent Relevant news: DirecTV
Acquisition
Key Statistics
Industry
Sector
Current Price (7/24/2015)
52-week Price Range
Average Daily Volume
Market Cap (7/24/2015)
Enterprise Value
P/E (TTM)
Est. P/E (CY)
Dividend Yield
Share Outstanding
Telecom Sector
Diversified Telecom
$34.29
$32.07 - $36.63
33.432 million
$178.07 billion
$276.46 billion
13.69
13.41
5.45%
5.221 billion
AT&T Operating Metrics
80000
134000
75000
132000
70000
•
Revenue growth has been
primarily due to strong
connections growth in wireless
•
Wireline is in decline – endemic
to the industry
•
ARPU has stabilized after
declining in 2014 (succumbed to
competition), but is on the rise
•
Strong growth in connected
devices – including connected
cars
130000
65000
128000
Wireless
126000
Wireline
60000
55000
124000
50000
45000
122000
40000
120000
2010
2011
2012
2013
TOTAL
2014
25000
24000
23000
22000
21000
20000
19000
18000
17000
16000
15000
69
68
67
66
65
Connected Devices
64
ARPU
63
62
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14
Q1
'15
Q2
'15
AT&T: Merger with DirecTV
•
•
Combined with AT&T’s recent acquisition of
Lusacell and Nextel Mexico, DirecTV adds to
AT&T’s diversification strategy in content
distribution
Bundled services to bring cost and revenue
synergies
•
Take advantage of the growing Latin American
Market
•
Increased negotiation leverage with media
content providers
AT&T Old Revenue Mix
International,
1.5%
Wireline,
43.1%
Wireless,
55.4%
AT&T New Revenue Mix
International,
5.2%
Sport
Networks,
0.1%
Wireless,
44.5%
Wireline,
50.2%
AT&T: Latin America Growth Opportunity
•
Mexico market has reached 86% penetration, as
opposed to ~ 98% in US.
•
Even more significant opportunity for mobile
broadband. OECD: only 13% on standard or
dedicated mobile data plan.
•
40% Pay-TV penetration rates in Latin America
•
DirecTV Latin American operations serve Brazil,
Argentina, Chile, Columbia, Ecuador, Peru,
Puerto Rico, and Venezuela
AT&T: DCF
Terminal
Analyst: Pravin Talreja
7/24/2015
Year
Terminal
2015E
Revenue
% Growth
134,759
1.7%
EBT
EBT Margin
18,296
13.6%
Taxes
Tax Rate
6,330
Net Income
% Growth
14,516
34.6%
2016E
2017E
Disc. Rate =
FCF Growth
=
8.50%
2019E
2020E
2018E
2.0%
2021E
20122E
2023E
2024E
137,523
138,047
138,737
140,125
142,226
144,644
147,537
150,488
153,498
2.1%
0.4%
0.5%
1.0%
1.5%
1.7%
2.0%
2.0%
2.0%
2025E
156,568
2.0%
19,532
14.2%
20,159
14.6%
20,256
14.6%
20,458
14.6%
20,623
14.5%
20,973
14.5%
21,245
14.4%
21,670
14.4%
22,104
14.4%
22,546
14.4%
6,758
34.6%
6,975
34.6%
7,008
34.6%
7,079
34.6%
7,136
34.6%
7,257
34.6%
7,351
34.6%
7,498
34.6%
7,648
34.6%
7,801
34.6%
16,046
10.5%
16,258
1.3%
13,247
-18.5%
13,380
1.0%
13,487
0.8%
13,717
1.7%
13,894
1.3%
14,172
2.0%
14,456
2.0%
14,745
2.0%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
18,500
13.7%
(20)
0.0%
17,000
12.6%
18,200
13.2%
(47)
0.0%
17,200
12.5%
18,100
13.1%
(48)
0.0%
17,400
12.6%
17,897
12.9%
(55)
0.0%
17,620
12.7%
17,656
12.6%
(56)
0.0%
17,516
12.5%
17,494
12.3%
(57)
0.0%
17,494
12.3%
17,647
12.2%
(58)
0.0%
17,647
12.2%
17,704
12.0%
(59)
0.0%
17,704
12.0%
17,758
11.8%
(60)
0.0%
17,758
11.8%
17,959
11.7%
(61)
0.0%
17,959
11.7%
18,005
11.5%
(63)
0.0%
18,005
11.5%
Free Cash Flow
% Growth
15,996
17,000
6.3%
16,910
-0.5%
13,469
-20.4%
13,464
0.0%
13,430
-0.2%
13,659
1.7%
13,835
1.3%
14,112
2.0%
14,394
2.0%
14,682
2.0%
Terminal
Value
230,399
Free Cash
Yield
6.37%
Terminal P/E
15.6
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
96,162
49%
101,902
198,064
51%
100%
Free Cash Flow Yield
8.93%
Current P/E
Projected P/E
12.3
13.6
11.2
12.3
11.0
12.2
Current EV/EBITDA
Projected EV/EBITDA
6.3
6.7
6.1
6.6
6.1
6.5
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
Cash/share
Terminal
EV/EBITDA
5,221.0
$
$
34.29
37.94
10.6%
82,067
8,603
1.65
$
37.54
Consensus Target
7.5
DTV: DCF
Analyst: Pravin Talreja
7/24/2015
Year
2015E
Revenue
% Growth
34,611
EBT
EBT Margin
4,545
Taxes
Tax Rate
1,636
Net Income
% Growth
2,909
2016E
35,978
Terminal
Disc. Rate =
10.50%
Terminal
FCF Growth =
3.5%
2019E
2020E
2017E
37,407
2018E
38,866
40,343
41,916
2021E
43,593
20122E
45,206
2023E
46,788
2024E
48,426
2025E
50,121
4.0%
4.0%
3.9%
3.8%
3.9%
4.0%
3.7%
3.5%
3.5%
3.5%
13.1%
4,892
13.6%
5,162
13.8%
5,364
13.8%
5,567
13.8%
5,743
13.7%
5,929
13.6%
6,148
13.6%
6,363
13.6%
6,537
13.5%
6,766
13.5%
36.0%
1,761
36.0%
1,858
36.0%
1,931
36.0%
2,004
36.0%
2,067
36.0%
2,134
36.0%
2,213
36.0%
2,291
36.0%
2,353
36.0%
2,436
36.0%
3,131
3,304
3,433
3,563
3,675
3,794
3,935
4,072
4,184
4,330
7.6%
5.5%
3.9%
3.8%
3.1%
3.2%
3.7%
3.5%
2.7%
3.5%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
3,011
8.7%
(77)
-0.2%
3,300
9.5%
3,094
8.6%
(27)
-0.1%
3,250
9.0%
3,142
8.4%
(64)
-0.2%
3,200
8.6%
3,226
8.3%
(78)
-0.2%
3,187
8.2%
3,268
8.1%
(81)
-0.2%
3,268
8.1%
3,311
7.9%
(84)
-0.2%
3,311
7.9%
3,357
7.7%
(87)
-0.2%
3,357
7.7%
3,390
7.5%
(90)
-0.2%
3,390
7.5%
3,369
7.2%
(94)
-0.2%
3,369
7.2%
3,390
7.0%
(97)
-0.2%
3,390
7.0%
3,408
6.8%
(100)
-0.2%
3,408
6.8%
Free Cash Flow
% Growth
2,543
2,948
15.9%
3,182
7.9%
3,394
6.7%
3,482
2.6%
3,591
3.1%
3,707
3.2%
3,844
3.7%
3,979
3.5%
4,087
2.7%
4,230
3.5%
Terminal
Value
62,546
Free Cash
Yield
6.76%
Terminal P/E
14.4
NPV of Cash Flows
21,265
48%
NPV of terminal value
Projected Equity Value
23,045
44,310
52%
100%
Free Cash Flow Yield
5.25%
Current P/E
Projected P/E
16.7
15.2
15.5
14.2
14.7
13.4
Current EV/EBITDA
Projected EV/EBITDA
8.2
7.7
7.8
7.2
7.5
7.0
Shares Outstanding
AT&T Offered Price
Implied equity value/share
Premium
Debt
Cash
Cash/share
510.0
$
$
95.00
86.88
9.3%
17,058
4,284
8.40
- This was a 10% premium on DTV's closing price on May 16th.
Terminal
EV/EBITDA
7.4
DTV: Terms of Deal
• Deal size: $49 billion ($67.1 billion including debt)
• $95 per share:
• 1.892 AT&T shares for each DTV share
• $28.50 cash ($14.5 billion)
• Funded by a combination of cash at hand,
sale of certain assets, and financing
• Assumption:
• $4 billion cash used
• $Finance $8 billion
AT&T Combined: DCF
Analyst: Pravin Talreja
Terminal
Disc. Rate =
9.25%
Terminal
FCF Growth
=
2.5%
2019E
2020E
7/24/2015
Year
Revenue
2015E
169,370
% Growth
EBT
EBT Margin
Taxes
Tax Rate
Net Income
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
173,502
2.4%
22,841
13.5%
7,967
34.9%
14,874
% Growth
Add Depreciation/Amort
2016E
24,424
14.1%
8,519
34.9%
15,905
6.9%
21,511
12.7%
(97)
-0.1%
20,300
21,294
12.3%
(74)
0.0%
20,450
2017E
175,454
1.1%
25,321
14.4%
8,833
34.9%
16,488
3.7%
21,242
12.1%
(112)
-0.1%
20,600
2018E
177,603
1.2%
25,619
14.4%
8,939
34.9%
16,680
1.2%
21,123
11.9%
(133)
-0.1%
20,807
180,467
1.6%
26,026
14.4%
9,083
34.9%
16,943
1.6%
20,923
11.6%
(137)
-0.1%
20,783
184,143
2.0%
26,365
14.3%
9,203
34.9%
17,163
1.3%
20,805
11.3%
(141)
-0.1%
20,805
2021E
188,237
2.2%
26,902
14.3%
9,391
34.9%
17,511
2.0%
21,003
11.2%
(145)
-0.1%
21,003
20122E
192,743
2.4%
27,393
14.2%
9,564
34.9%
17,829
1.8%
21,095
10.9%
(149)
-0.1%
21,095
2023E
197,276
2.4%
28,033
14.2%
9,789
34.9%
18,245
2.3%
21,126
10.7%
(154)
-0.1%
21,126
2024E
201,923
2.4%
28,641
14.2%
10,001
34.9%
18,640
2.2%
21,349
10.6%
(158)
-0.1%
21,349
2025E
206,688
2.4%
29,312
14.2%
10,237
34.9%
19,075
2.3%
21,413
10.4%
(163)
-0.1%
21,413
12.0%
11.8%
11.7%
11.7%
11.5%
11.3%
11.2%
10.9%
10.7%
10.6%
10.4%
15,988
16,675
17,018
16,863
16,946
17,022
17,366
17,680
18,091
18,482
18,912
AT&T Combined: DCF (Cont.)
Free Cash Flow
% Growth
15,988
16,675
4.3%
17,018
2.1%
16,863
-0.9%
16,946
0.5%
17,022
0.4%
17,366
2.0%
17,680
1.8%
18,091
2.3%
18,482
2.2%
18,912
2.3%
Additional Interest Expense
380
380
380
380
380
380
380
380
380
380
380
Cost synergy
100
-1000
-2500
-2500
-2500
-2500
-2500
-2500
-2500
-2500
-2500
(167)
216
740
740
740
740
740
740
740
740
740
15,676
17,079
18,398
18,243
18,326
18,402
18,746
19,060
19,471
19,861
20,292
Terminal
Value
308,139
Free Cash
Yield
6.59%
Terminal
P/E
16.2
(Reduced) Additional Tax
Revised Fee Cash Flow
NPV of Cash Flows
117,941
48%
NPV of terminal value
Projected Equity Value
127,213
245,155
52%
100%
Free Cash Flow Yield
7.39%
Current P/E
Projected P/E
14.3
16.5
13.3
15.4
12.9
14.9
Current EV/EBITDA
Projected EV/EBITDA
6.8
7.6
6.6
7.4
6.5
7.2
Shares Outstanding
Current AT&T Price
Implied equity value/share
Premium
Debt
Cash
Cash/share
6,185.9
$
$
34.29
39.63
15.6%
99,125
8,887
1.44
Terminal
EV/EBITDA
7.9
AT&T Combined: Sensitivity Analysis
Discount Rate
Growth Rate
$
39.63
8.00%
8.25%
8.50%
8.75%
9.00%
9.25%
9.50%
9.75%
10.00%
10.25%
10.50%
1.50% $
43.91 $
42.28 $
40.76 $
39.35 $
38.03 $
36.80 $
35.65 $
34.56 $
33.54 $
32.58 $
31.67
1.75% $
44.92 $
43.19 $
41.60 $
40.11 $
38.73 $
37.44 $
36.23 $
35.10 $
34.04 $
33.04 $
32.10
2.00% $
46.01 $
44.18 $
42.49 $
40.93 $
39.47 $
38.12 $
36.86 $
35.67 $
34.57 $
33.52 $
32.55
2.25% $
47.20 $
45.25 $
43.46 $
41.81 $
40.27 $
38.85 $
37.52 $
36.28 $
35.13 $
34.04 $
33.02
2.50% $
48.50 $
46.42 $
44.51 $
42.75 $
41.13 $
39.63 $
38.24 $
36.94 $
35.73 $
34.59 $
33.53
2.75% $
49.92 $
47.69 $
45.65 $
43.78 $
42.06 $
40.47 $
39.00 $
37.64 $
36.36 $
35.18 $
34.07
3.00% $
51.48 $
49.08 $
46.90 $
44.90 $
43.07 $
41.38 $
39.83 $
38.39 $
37.05 $
35.80 $
34.64
3.25% $
53.21 $
50.61 $
48.26 $
46.12 $
44.16 $
42.37 $
40.72 $
39.20 $
37.79 $
36.48 $
35.25
3.50% $
55.13 $
52.30 $
49.76 $
47.45 $
45.36 $
43.44 $
41.69 $
40.07 $
38.58 $
37.20 $
35.91
Consensus Target: $37.54 (This might be prior to DTV Impact)
AT&T Recommendation
• My Recommendation: BUY
– Connected Devices growth (connected
cars on the rise)
– Diversified strategy – growth opportunity in
Latin America
– Bundled packaging – Quad Play
– Better leverage ratio (Total Debt / Total
Equity: 129.91%; Verizon is 882.95%)
S&P 500
S5TELS
VZ
T
17.82
22.42
11.78
13.41
P/B
2.80
1.94
16.40
2.05
P/S
1.80
0.99
1.47
1.34
Div. Yld.
2.2%
4.8%
4.8%
5.5%
Est. PE (CY)
• Risk
– Political instability and currency
fluctuations in Latin American nations
Agenda
1.
2.
3.
4.
5.
6.
Sector Review
Stock Recommendation
Verizon
AT&T
T-Mobile
Summary
T-Mobile
•
Controlling company: Deutsche Telekom
•
Healthy subscriber and revenue growth – less
reliance on Tablet sales
•
Margins have suffered – disruptive price competition
Revenue
at the low end of the market
Net Income
NI %
•
Deutsche Telekom CEO: Current model not
sustainable
•
Analysts estimate ~ 13.5% acquisition premium
potential on current price
•
Deutsche Telekom looking for cash offers. Potential
suitors: Sprint (merger), Dish, Comcast
2010
4,069
193
4.7%
2011
4,847
301
6.2%
* Merged with Metro PCS
2012
5,101
394
7.7%
2013*
24,420
35
0.1%
2014
29,564
247
0.8%
Agenda
1.
2.
3.
4.
5.
6.
Sector Review
Stock Recommendation
Verizon
AT&T
T-Mobile
Summary
Summary
• SELL all stake in VZ
• DirecTV shares will convert to AT&T:
1.8% SIM weighting based on
7/24/2015 stock price
• BUY AT&T to bring SIM Telecom
weight to 2.27% (Equal to S&P 500)
QUESTIONS?