Stock
Analysis
Telecom
Piaoyun Xing
Tianchao Xu
April 15, 2014
Agenda
1. Sector Review
2. AT&T
3. Verizon
4. Summary
Sector Review
• As of 4/15, Telecom S&P 500 weight = 2.46% (smallest
among all industries)
• SIM portfolio Telecom weight = 1.21% (smallest among
all industries holding)
• Only SIM holding is T-Mobile (TMUS)
• Top 5 performer: overall 8.30%; last quarter -1.25%
Sector Review
AT&T
Verizon
Summary
Sector Review
•
Valuation
Absolute Basis
P/Trailing E
P/Forward E
P/S
P/B
P/CF
Sector Review
Benchmark
S&P 500
17.38
15.91
1.7
2.63
9.31
Sector
Telecom
15.64
12.94
1.25
2.43
4.17
AT&T
AT&T
14.08
13.14
1.46
2.01
5.41
Company
Verizon
16.81
13.68
1.13
3.51
3.52
Verizon
T-Mobile
312.27
97.42
0.96
1.86
6.18
Summary
AT&T Overview
•
AT&T distinguishes itself in the
telecommunications services area
and become the global giant in IPbased communications services
and the U.S. leading provider of
various communication services
and products.
T US
Price (4/14/2014): $ 35.36
Market Cap: $ 182.58 B
Enterprise Value: $ 254.52 B
Dividend Yield: 5.2%
Shares Outstanding: 5.2 B
52-week Price Range: $ 31.74 - $ 39
Sector Review
AT&T
Verizon
Summary
AT&T Overview
• Business Operational Segments: Wireless, Wireline, and Other
• Future Focus: Wireless, Business Customers, Data/Broadband
Sector Review
AT&T
Verizon
Summary
AT&T Financials
Revenue and Profit (billions)
180
Revenue
EBITDA
Operating Income
Net Income
150
120
90
60
30
0
2011
2012
2013
126.72
127.44
128.75
Growth
2.0%
0.6%
1.0%
EBITDA
38.64
37.85
41.29
30.5%
29.7%
32.1%
9.29
13.00
30.48
Margin %
7.3%
10.2%
23.7%
Net Income
3.94
7.26
18.25
Margin %
3.1%
5.7%
14.2%
Revenue
Margin %
Operating Income
Sector Review
AT&T
Low revenue growth
Significant increase
in margins
Verizon
Summary
AT&T Financials
Ratio Analysis
Return
Return on Assets %
Return on Equity %
Dividend Yield %
Margin Analysis
Gross Margin %
EBITDA Margin %
EBIT Margin %
Net Income Margin %
Growth Over Prior Year
Total Revenue
Gross Profit
EBITDA
EBIT
Net Income
Diluted EPS before Extra
Long Term Solvency
Total Debt/Equity
Total Debt/Capital
Total Liabilities/Total Assets
Ratios
EV/Revenue
EV/EBITDA
Sector Review
2011A
2012A
2013A
3.8%
3.8%
5.1%
3.0%
7.6%
5.3%
6.9%
20.1%
5.7%
56.7%
25.6%
12.9%
3.1%
56.7%
22.8%
10.2%
5.7%
60.0%
36.3%
23.7%
14.2%
2.0%
(3.0%)
(11.2%)
(17.0%)
(80.1%)
(79.3%)
0.6%
0.5%
(10.6%)
(20.3%)
84.2%
88.0%
1.0%
7.0%
61.1%
134.5%
151.2%
171.3%
61.2%
38.0%
60.9%
76.1%
43.2%
66.0%
82.3%
45.2%
67.1%
1.85x
5.87x
2.04x
7.23x
2.02x
8.89x
AT&T
ROA and ROE peaked in 2013
Div yield maintained high
D/E Sector average 98.61%
Verizon
Summary
AT&T Valuation
•
Multiple Approach : Stock of AT&T is slightly undervalued right now.
Absolute Basis
P/Trailing E
P/Forward E
P/S
P/B
P/CF
Absolute
Basis
Benchmark
S&P 500
17.38
15.91
1.7
2.63
9.31
Sector
Telecom
15.64
12.94
1.25
2.43
4.17
Company
Verizon
16.81
13.68
1.13
3.51
3.52
AT&T
14.08
13.14
1.46
2.01
5.41
AT&T Inc.
High Median Low
P/Forward E 21.61
T-Mobile
312.27
97.42
0.96
1.86
6.18
Multiple Valuation
Current
Target
multiple
Target
E/S/B/CF
Target
Price
14.67
10.10
13.14
15.00
2.69
$40.35
P/S
2.20
1.50
1.35
1.46
1.50
26.26
$39.39
P/B
2.25
1.84
1.56
2.01
1.80
17.41
$31.34
P/CF
8.89
5.78
4.81
5.41
5.50
6.86
$37.73
Average of target prices
$37.20
Upside potential
6.08%
Sector Review
AT&T
Verizon
Summary
AT&T Valuation
AT&T Inc. (T)
•
DCF
Analyst: Piaoyun Xing
Date: 03/31/2014
Terminal Discount Rate =
Terminal FCF Growth =
Year
2014E
Revenue
131,302
% Grow th
23,634
Operating Margin
18.0%
Interest and Other
3,676
Interest % of Sales
2.8%
Taxes
7,092
Tax Rate
34.0%
Net Income
13,466
% Grow th
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
137,985
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
3,762
2.8%
7,250
34.0%
13,773
24,837
18.0%
3,864
2.8%
7,437
34.0%
14,137
2.3%
25,409
18.0%
3,952
2.8%
7,295
34.0%
14,161
144,546
2.4%
27,464
19.0%
4,047
2.8%
7,962
34.0%
15,455
2019E
148,015
2.4%
28,123
19.0%
4,144
2.8%
8,153
34.0%
15,826
2020E
151,420
2021E
154,902
2.3%
30,284
2.3%
30,980
20.0%
20.0%
4,240
4,337
2.8%
2.8%
8,855
9,059
34.0%
17,189
34.0%
17,585
2022E
158,310
2.2%
33,245
21.0%
4,433
2.8%
9,796
34.0%
19,016
2023E
161,793
2.2%
33,977
21.0%
4,530
2.8%
10,012
34.0%
19,435
2024E
165,191
2.1%
36,342
22.0%
4,625
2.8%
10,784
34.0%
20,933
0.2%
9.1%
2.4%
8.6%
2.3%
8.1%
2.2%
7.7%
18,776
19,080
19,594
19,762
20,236
20,278
20,442
20,602
20,739
21,033
21,475
14.3%
14.2%
14.2%
14.0%
14.0%
13.7%
13.5%
13.3%
13.1%
13.0%
13.0%
137
-199
-235
141
145
148
151
155
158
162
165
0.1%
-0.1%
-0.2%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
22,321
22,170
22,078
21,880
21,682
21,462
21,956
21,686
21,372
21,842
21,475
17.0%
16.5%
16.0%
15.5%
15.0%
14.5%
14.5%
14.0%
13.5%
13.5%
13.0%
10,058
10,484
11,418
12,185
14,154
14,790
15,826
16,655
18,541
18,787
21,098
4.2%
8.9%
6.7%
16.2%
4.5%
7.0%
5.2%
11.3%
1.3%
12.3%
13.0
16.5
5.8
6.9
Shares Outstanding
18.0%
141,159
2018E
2.6%
96,060
125,663
221,724
5.74%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
24,185
2.7%
2017E
2.3%
% Grow th
Sector Review
134,363
2016E
2.3%
Operating Income
Current Price
Implied equity value/share
Upside/(Downside)
2015E
8.5%
1.0%
43%
57%
100%
Terminal Value
Free Cash Yield
12.7
16.1
5.7
6.8
12.4
15.7
5.6
6.6
284,122
7.43%
Terminal P/E
13.6
Terminal EV/EBITDA
6.2
5,000
$
$
35.07
44.34
26.4%
AT&T
Verizon
Summary
AT&T Valuation
AT&T Inc. (T)
Analyst: Piaoyun Xing
Date: 03/31/2014
Year
Terminal Discount Rate =
Terminal FCF Growth =
2014E
Revenue
131,302
% Grow th
Operating Income
23,634
18.0%
3,676
Interest % of Sales
Taxes
2.8%
7,092
Tax Rate
Net Income
34.0%
13,466
% Grow th
Add Depreciation/Amort
18.0%
3,762
2.8%
7,250
34.0%
13,773
137,985
2017E
141,159
2.7%
24,837
2.3%
25,409
18.0%
3,864
18.0%
3,952
2.8%
7,437
2.8%
7,295
34.0%
14,137
34.0%
14,161
2018E
144,546
2.4%
27,464
19.0%
4,047
2.8%
7,962
34.0%
15,455
2019E
148,015
2.4%
28,123
19.0%
4,144
2.8%
8,153
34.0%
15,826
2020E
151,420
2.3%
30,284
20.0%
4,240
2.8%
8,855
34.0%
17,189
2021E
154,902
2.3%
30,980
20.0%
4,337
2.8%
9,059
34.0%
17,585
2022E
158,310
2.2%
33,245
21.0%
4,433
2.8%
9,796
34.0%
19,016
2023E
161,793
2024E
165,191
2.2%
33,977
21.0%
4,530
2.1%
36,342
22.0%
4,625
2.8%
10,012
34.0%
19,435
2.8%
10,784
34.0%
20,933
2.6%
0.2%
9.1%
2.4%
8.6%
2.3%
8.1%
2.2%
7.7%
18,776
19,080
19,594
19,762
20,236
20,278
20,442
20,602
20,739
21,033
21,475
14.3%
14.2%
14.2%
14.0%
14.0%
13.7%
13.5%
13.3%
13.1%
13.0%
13.0%
Plus/(minus) Changes WC
137
-199
-235
141
145
148
151
155
158
162
165
0.1%
-0.1%
-0.2%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
22,321
22,170
22,078
21,880
21,682
21,462
21,956
21,686
21,372
21,842
21,475
17.0%
16.5%
16.0%
15.5%
15.0%
14.5%
14.5%
14.0%
13.5%
13.5%
13.0%
10,058
10,484
11,418
12,185
14,154
14,790
15,826
16,655
18,541
18,787
21,098
4.2%
8.9%
6.7%
16.2%
4.5%
7.0%
5.2%
11.3%
1.3%
12.3%
% of Sales
Capex % of sales
Free Cash Flow
24,185
2016E
2.3%
% of Sales
Subtract Cap Ex
134,363
2.3%
Operating Margin
Interest and Other
2015E
8.5%
1.0%
% Grow th
Sector Review
AT&T
Verizon
Summary
AT&T Valuation
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
96,060
125,663
221,724
5.74%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
13.0
16.5
5.8
6.9
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside)
43%
57%
100%
Terminal Value
284,122
Free Cash Yield
12.7
16.1
5.7
6.8
12.4
15.7
5.6
6.6
Terminal P/E
13.6
Terminal EV/EBITDA
6.2
5,000
$
$
35.07
44.34
26.4%
Sector Review
AT&T
Verizon
7.43%
Summary
AT&T Valuation
Sensitivity Analysis: $44.34 - $54.82
Discounted rates and terminal growth used by other analysts.
Terminal
Growth
$
Terminal
Growth
•
•
Sector Review
44.34
0.5%
1.0%
1.5%
2.0%
26%
0.5%
1.0%
1.5%
2.0%
7.5%
49.61
52.03
54.85
58.18
Discounted Rate
8.0%
8.5%
45.89
42.66
47.90
44.34
50.22
46.27
52.93
48.50
9.0%
39.81
41.24
42.86
44.71
9.5%
37.29
38.51
39.88
41.44
7.5%
41%
48%
56%
66%
Discounted Rate
8.0%
8.5%
31%
22%
37%
26%
43%
32%
51%
38%
9.0%
14%
18%
22%
27%
9.5%
6%
10%
14%
18%
AT&T
Verizon
Summary
AT&T Valuation
•
Summary
AT&T
Price
Per Share
Upside
Potential
Weight
DCF
$44.34
26.4%
0.85
Multiples
Price Target
$37.20
6.08%
0.15
$43.27
23.4%
1.00
Sector Review
AT&T
Verizon
Summary
AT&T Risk Factors
Upside Factors / Catalysts
•
Wireless: Well-established LTE network provides a subscription growth
opportunity for AT&T, generating more revenue in wireless segment;
AT&T has one of the largest Wi-Fi hotspot networks in America to support
this growing trend.
•
Wireline: Segment benefits from the popularity of video streaming;
AT&T will launch a series of promotion of the VIP service and U-verse
services which is comprised entirely of fiber optics, increasing the ARPU
and the amount of subscriber.
•
M2M services expansion along with smart-phone penetration offer more
room for AT&T to grow its wireless business in the long term.
Sector Review
AT&T
Verizon
Summary
AT&T Risk Factors
Downside Factors
•
Intensive customer acquisition and price war among wireless carriers
might hurt the margins and lead to a material change in market share
division.
•
Spectrum constriction might slow down the further expansion of network
construction.
•
New communication methods and cross-industry integration might
change the role of telecom companies in the long term.
Sector Review
AT&T
Verizon
Summary
AT&T Recommendation
BUY
YE2014 Target Price
$43.27
Total Projected Return
28.6%
Sector Review
AT&T
Verizon
Summary
Verizon Overview
VZ US
•
Two main segments:
Verizon Wireless and Wireline
Price (4/14/2014): $ 47.27
•
America's largest 4G LTE Network
- covering 97% of US
- 100% LTE
- 2x any other network
Sector Review
AT&T
Market Cap: $ 194.34B
Enterprise Value: $ 234.41B
Dividend Yield: 4.50%
Shares Outstanding: 4.14 B
52-week Price Range: $ 45.08- $ 54.31
Verizon
Summary
Verizon Segment Overview
FY2013 EBITDA
FY2013 Revenue
Sector Review
AT&T
Verizon
Summary
Verizon Investment Thesis
 Clear Path for Revenue Growth
- feature-to-smart migration (25 mm customers)
- 3G-to-4G migration (26 mm customers)
- "EDGE + More Everything" leads to more entrenched customers and
more data consumption
- Tablet data usage (only 8%-9% has one tablet connected in the network)
Sector Review
AT&T
Verizon
Summary
Verizon Investment Thesis
 Defensive Positioning Against Competitors
- The largest, 100% 4G LTE network
- Differentiated strategy
- Strengthened value proposition with Verizon EDGE + More Everything
Plan
More Everything Plan: more data allowance for every price level
EDGE: installment phone purchase + flexible upgrade ability
More Everything + EDGE:
$10 off for 250MB-8GB plan + $25 off for 10GB and greater
Sector Review
AT&T
Verizon
Summary
Verizon Investment Thesis
 Barriers High for TMUS and S to Become Credible Threat
- Masayoshi Son identified scale as crucial and has been lobbying hard for
the merger with T-Mobile
- DOJ and FCC expressed preference for 4 carriers instead of 3
- T-Mobile’s current insurgence validates the rejection of TMUS-T merger
- Sprint busy with developing Sprint Spark, making integrating TMUS
cumbersome
Sector Review
AT&T
Verizon
Summary
Verizon Investment Thesis
 Assortment of Key Strategic Assets Deepens Moats
Wireless
- Stellar spectrum holdings concentrated in lower frequency which allow
for better penetration in densely populated area and higher connection rate
and lower drop rate
- Bidding advantage in the 2015 upcoming auction of 600 MHz spectrums
Sector Review
AT&T
Verizon
Summary
Verizon Investment Thesis
 Assortment of Key Strategic Assets Deepens Moats
Wireline
- Majority of the growth comes from FiOS broadband and streaming
service
- Acquisitions of strategic assets:
content delivery network for faster delivery
simplifying cross-platform streaming
IP-based internet TV content
Sector Review
AT&T
Verizon
Summary
Verizon Benchmarking
- Manageable leverage ratio
- Leading coverage ratio
- Superior ROE with lower-than-peers leverage
Sector Review
AT&T
Verizon
Summary
Verizon Benchmarking
- High margins indicate operating efficiency and pricing power
Sector Review
AT&T
Verizon
Summary
Verizon Relative Valuation
- Except for EV/Revenue, all the other multiples are lower than peers
- Discrepancy exists between valuation and operating performance
Sector Review
AT&T
Verizon
Summary
Verizon Relative Valuation
- Factoring in the frothy equity market and concern for competition, I assign
Verizon a 6.0x EV/EBITDA multiple. Implied share price: $52.6
Sector Review
AT&T
Verizon
Summary
Verizon DCF Valuation
Sector Review
AT&T
Verizon
Summary
Verizon Sensitivity Analysis
Sector Review
AT&T
Verizon
Summary
Verizon Weighted Valuation
Methodology
Valuation Weighting Weighted Price
Relative Valuation
$52.60
20%
$10.52
DCF Valuation
$55.40
80%
$44.32
$54.84
Rating:
BUY
Current Price: $ 46.91
Target Price: $ 54.84
Upside: 16.9%
Sector Review
AT&T
Verizon
Summary
Verizon Risk Consideration
 Regulatory headwind

Adverse change in the credit environment
 Intensified price competition
 Competitors catching up on 4G build-out
Sector Review
AT&T
Verizon
Summary
Summary
Stock
Rating
Current
Price
T
LVLT
VZ
WIN
BUY
AVOID
BUY
AVOID
$35.36
$37.75
$46.91
$8.74
Sector Review
Total
Expected
Return
Current
Weight
Recommended
weight
$43.27 +28.6%
$39.51 +4.66%
$54.84 +16.9%
$8.25
-5.6%
0 bps
0 bps
0 bps
0 bps
80 bps
0 bps
40bps
0 bps
Target
Price
AT&T
Verizon
Summary
Q&A
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