Telecommunica+on
TIANHAO XU, JINGHAO YAO, ANTHONY ZAC
Agenda
1.Sector Overview 2.Business Analysis 3.Economic Analysis 4.Financial Analysis 5.Valua7on Analysis 6.Recommenda7on Overview
Size: 436.6billion Compared with S&P 500, SIM overweighs by 0.14% The Only stock SIM holding is Verizon (VZ) S&P 500 Telecomm
unication
Services,
2.36% U7li7es, Materials, 3.50% 2.98% SIM Telecomm
unication
Services,
2.50%
Consumer Discreionary, 11.98% Materials, 2.91% Consumer Staples, 9.41% Informa7on Technology, 19.44% Energy, 10.32% Indus7als, 10.35% HealthCare, 13.57% Financials, 16.09% Informa7on Technology, 21.54% Indus7als, 6.93% HealthCare, 13.67% U7li7es, 1.93% Consumer Discreionary, 10.94% Consumer Staples, 9.58% Energy, 9.01% Financials, 18.75% Overview
Name Verizon AT&T Mkt Cap % of S&P 208.52 B 1.604% 180.68 B 1.390% Century 23.65 B 0.182% Link % of Sector 47.76% 41.38% 5.42% Industries: Integrated (cellular & Internet, TV)  AT&T  Verizon Wireless only (cellular)  T-­‐Mobile  Sprint Sector Performance
Growth rate: 2.42% (Telecom) vs 7.44% (S&P). 5% underperformance Year to date Quarter to date Agenda
1.Sector Overview 2.Business Analysis 3.Economic Analysis 4.Financial Analysis 5.Valua7on Analysis 6.Recommenda7on Industry Life Cycle
Wireless: Sales -­‐-­‐-­‐ increasing by 5.8% annually. CompeOOon -­‐-­‐-­‐ High price rivals among compe7tors Technology -­‐-­‐-­‐ 3G, 4G, LTE network and 5G coming soon Wireline Wireless Wireline: Sales CompeOOon Technology Conclusion Wireless ↑ ↑ ↑ Growing to Maturity Wireline → ↓ → Declining Sales -­‐-­‐-­‐ decreasing by 1.2% annually CompeOOon -­‐-­‐-­‐some small compe7tors are quiang Technology -­‐-­‐-­‐ no breakthrough recently. Business Cycle
Telecom The sales of wireline segment is
starting to decline, with a 1.2%
annually.
The sales of wireless segment is still
keep increasing by 5.8% annually, but
the growth rate slowed, comparing
with a growth of 7.4% between
2007-2011.
While the wireless segment is
overweight than wireline, so Telecom
industry just surpassed its peak and
currently is in the Recession period.
Geography and users
88% of area covered by 3G network
91% of users have the choice of 3
wireless providers
82% of users have the choice of 4
wireless providers
Regula+ons
Federal Communica7ons Commission (FCC) -­‐Developing and implemen7ng regulatory programs -­‐Conduc7ng inves7ga7ons and analyzing complaints -­‐Public safety and homeland security Title 47 of the United States Code -­‐defines the role and structure of the Federal Communica7ons Commission, an independent agency of the United States government, and the Na7onal Telecommunica7ons and Informa7on Administra7on, part of the United States Department of Commerce Porter’s Five Forces
Threat of new Entrants: low High capital and technology required Buyer power: Moderate Low switch cost Supplier Power: Moderate A lot of makers exis7ng, but need to pay premium to big Manufacturers. Threat of SubsOtute: High Products and services from non-­‐
tradi7onal telecom industries(SKYPE) CompeOOon: High Deregula7on law in 1990s; price war Barrier to Entry High Buyer Power Moderate Compe77on & Rivalry High Threat of Subs7tute High Supplier Power Moderate Agenda
1.Sector Overview 2.Business Analysis 3.Economic Analysis 4.Financial Analysis 5.Valua7on Analysis 6.Recommenda7on S&P500
Defensive sector BETA: 0.878 Correla7on: 0.633 Capital spending
R=0.292 Moderate correla7on with capital spending Employees on non-­‐farm net change
R=0.410 Moderate correla7on with employment Agenda
1.Sector Overview 2.Business Analysis 3.Economic Analysis 4.Financial Analysis 5.Valua7on Analysis 6.Recommenda7on Telecom Sector
REVENUE PER SHARE
Earning per share
Major Players Represent most of revenue in this sector
2.5% Revenue yearly growth rate Purple: T mobile Yellow: AT&T Blue: Verizon EPS GROWTH RATE Yellow: AT&T BLUE: Verizon Green: T mobile Gross margin of telecom sector compare to S&P 500 Higher gross margin compare to S&P 500
Green line: Telecom sector Yellow line: S&P 500 Opera7ng Margin compare to S&P
Higher opera7ng margin compare to S&P 500 result from decreasing spending on research and sales Blue: Telecom sector Green: S&P 500 Free cash flow per share Low free cash flow low cash flow growth rate because of slow revenue growth
Blue: Telecom sector Grey: S&P 500 Agenda
1.Sector Overview 2.Business Analysis 3.Economic Analysis 4.Financial Analysis 5.ValuaOon Analysis 6.Recommenda7on Valuation Analysis Overview
Telecom Sector Integrated Industry Wireless Industry AT&T Verizon T-­‐Mobile Sprint Market Cap 180,628.4 M 208,565.7 M 23,711.9 M 24,402.9 M Price $34.84 $50.27 $29.39 $6.10 •  Market Caps and price differ greatly between the Telecoms Sector and its industries. Valuation Analysis Historical
S&P 500 High Median Low Current P/E 262.1 19.32 5.41 17.8 P/S 33.25 2.03 0.17 1.77 P/B 868.3 3.13 0.43 2.73 P/CF 341.37 13.22 2.71 10.29 Debt/Assets 147.37 24.75 0 24.23 •  Historical data of S&P 500, all metrics are currently really close to their historical median. Valuation Analysis Historical
Telecom Sector High Median Low Current P/E 43.09 28.94 11.53 14.05 P/S 1.43 1.38 1.05 1.4 P/B 12.55 1.94 1.43 3.26 P/CF 5.41 4.64 4.18 5.23 Debt/Assets 66.89 48.27 26.26 37.46 •  Overall, metrics close to median historic levels. Valuation Analysis Absolute Basis
Absolute Basis Benchmark Sector Company S&P 500 Telecom AT&T Verizon T-­‐Mobile P/E 17.85 14.05 11.6 15.23 93.3 P/S 1.77 1.4 1.4 1.4 0.8 P/B 2.74 3.26 1.94 12.58 1.62 P/CF 184.82 30.65 5.4 5.2 5.1 Debt/Assets 24.22 37.46 26.26 34.1 45.4 •  Valua7on metrics vary greatly from company to company based on corporate decisions. Valuation Analysis Relative Basis
RelaFve Basis Benchmark Sector Company S&P 500 Telecom AT&T Verizon T-­‐Mobile P/E 1.00 0.79 0.65 0.85 5.23 P/S 1.00 0.79 0.79 0.79 0.45 P/B 1.00 1.19 0.71 4.59 0.59 P/CF 1.00 0.17 0.03 0.03 0.03 Debt/Assets 1.00 1.55 1.08 1.41 1.87 •  The Telecom sector is defensive rela7ve to the S&P 500. Valuation Analysis Overview
Agenda
1.Sector Overview 2.Business Analysis 3.Economic Analysis 4.Financial Analysis 5.Valua7on Analysis 6.RecommendaOon Recommendation Bull & Bear Scenarios
Bull Case/ Posi7ves •  Mobile to Mobile Service expansion na7onwide •  Increase demand for data usage (4G) •  Device growth, besides mobile, (tablet, computer, etc) Bear Case/ Nega7ves •  Price war between major players to gain market share •  New innova7ve ways of communica7on (subs7tutes) •  Expanded capabili7es of Wi-­‐Fi •  Decrease in demand for hardline communica7on •  Slow popula7on growth leads to slow demand growth for new subscribers Recommendation Summary
Main Conclusion: •  The Defensive nature of the telecom companies compared to the S&P could provide a diversifica7on benefit, however with an op7mis7c outlook on the economy and slow growth in our sector, we believe this benefit is not needed. Our Recommenda7on: •  We should underweight the Telecom sector as a whole to make it even with the S&P 500’s current weight. •  We should overweight AT&T due to its high dividend yield •  We should underweight T-­‐Mobile due to its high P/E riskiness. S&P 500 Current Weight SIM Class Weight 2.36% 2.50% Recommended Weight Weight Change 2.36% -­‐14 Basis Points What Ques+ons Do You Have?