Telecommunications Sector Presentation By Brad Moore Sector Overview The Telecommunications Services Sector contains companies that provide communications services primarily through a fixed-­‐line, cellular, wireless, high bandwidth and/or fiber optic cable network. Percent of S&P 500 Telecommunica+on Services , 2.49% 3.52% 3.08% 12.07% Consumer Discre9onary Consumer Staples 9.67% 18.41% Energy Financials Health Care 10.29% Industrials Informa9on Technology 10.73% Materials Telecommunica9on Services 16.43% 13.31% U9li9es As of 5/30/2014 Industries •  Diversified Telecommunication Services •  “Wireline” services •  Use broadband or fiber optic cable to transmit data •  Wireless Telecommunication Services •  Provide cellular or wireless services Companies Market Cap by Company Company AT&T Inc CenturyLink Inc Fron9er Communica9ons Corp Verizon Communica9ons Inc Windstream Holdings Inc Total Market Cap 184,686,934,030 21,771,564,850 5,787,377,130 206,891,404,360 5,703,758,280 424,841,038,650 Sector Performance -­‐ YTD Sector Performance -­‐ QTD Porter’s Five Forces Barriers to Entry •
High Capital Costs •
Must Build Network •
High Barriers to Entry Supplier Power Rivalry Buyer Power •
Limited Spectrum Available •
Very Concentrated •
Unconcentrated Buyers •
Highly Regualted by FCC •
Few Large Players •
Long-­‐Term Contracts •
Leading to Acquisitions/Mergers •
Competing for limited resources •
High Switching Costs •
High Supplier Power •
High Rivalry •
Low Buyer Power Threat of Substitute •
Huge Shift from Landline to Wireless •
Future of Television •
Smartphones Here to Stay •
Low Threat of Substitutes Financial Analysis 2008 Sales Sales Growth 2009 2010 2011 2012 2013 2014 108.54 111.94 113.63 116.42 117.15 114.53 118.47 3.13% 1.51% 2.46% 0.63% -­‐2.24% 3.44% 2015 2016 Trend 121.1 122.31 Increasing 2.22% 1.00% Decreasing Gross Margin % 59.9% 58.21% 57.58% 56.36% 56.64% 61.59% 59.95% 60.11% 64.49% Increasing Oper Margin % 16.0% 14.30% 13.76% Profit Margin % 6.7% 5.75% 6.98% 9.96% 9.77% 24.19% 24.51% Increasing 1.53% 1.73% 10.64% 11.26% Increasing Sales and Sales Growth 2008 Sales 2009 2010 2011 2012 2013 2014 108.54 111.94 113.63 116.42 117.15 114.53 118.47 Sales Growth 3.13% 1.51% 2.46% 0.63% -­‐2.24% 3.44% 2015 2016 121.1 122.31 Increasing 2.22% 1.00% Decreasing •  Wireline sales are decreasing year over year •  Smartphones account for 70% of all subscribers and 85% of new sales •  Future Growth – From Fidelity •  Usage-­‐Based Pricing •  Connected Devices Trend Margins 2008 2009 2010 2011 2012 2013 2014 2015 2016 Trend Gross Margin % 59.9% 58.21% 57.58% 56.36% 56.64% 61.59% 59.95% 60.11% 64.49% Increasing Oper Margin % 16.0% 14.30% 13.76% Profit Margin % 6.7% 5.75% 6.98% 9.96% 9.77% 24.19% 24.51% Increasing 1.53% 1.73% 10.64% 11.26% Increasing •  Adding more devices to their plan – higher margin •  Smartphone vs. Basic Cell Phone •  Change in GAAP revenue recognition Price to Earnings – S&P vs Tele Telecom S&P 500 Price to Sales – S&P vs Tele Telecom S&P 500 Price to Book – S&P vs Tele Telecom S&P 500 Affect of Mergers/Acquisitions •  Difficulty using valuation methods on multi-­‐industry businesses •  Example AT&T/DirecTV •  Creates riskiness of cash flows – increase in discount rate •  How realistic are synergies? •  Negative impacts of transaction •  Google acquisition of wireless start up Recommendation •  Currently, overweight in Telecommunications (2.84% vs. 2.49% of S&P) •  Should move to be underweight •  No diversification within Telecommunications (AT&T only) •  Spread investment over multiple companies that look appealing •  Be ready for a rebound in this sector