Telecom Sector Presenstation
Jonathan Rice
Tianze Zhang
Xuan Zhao
Agenda
• Sector Overview
• Business Analysis
• Economic Analysis
• Financial Analysis
• Valuation Analysis
• Recommendation
Page  2
Sector Overview
Overview
•
Page  4
SIM is 200 basis points underweighted than S&P 500
Major Industries
Sector
Industry
SubIndustry
Page  5
Telecom
Diversified
Telecommunication
Services
Alternative Carriers
Integrated
Telecommunication
Services
Wireless
Telecommunication
Services
Wireless
Telecommunication
Services
Major Industries - GICS
•However…..
 No alternative carriers in the S&P 500
 8 companies are in the S&P 500
 5 of them belong to the integrated
telecom industry
 3 of them belong to the wireless
telecom industry
Page  6
Major Industries – Other Standard
•Roughly Speaking……
 Wireline Business (Voice, Internet & Business Solutions)
 Wireless Business (Voice, Wireless Data, etc.)
Industry
Business
Page  7
Integrated
Telecom
Wireless
Wireline
Major Players in the Market
Market Capitalization
$ 186.3 Billion
$ 112.2 Billion
$ 23.5 Billion
$ 16.1 Billion
Page  8
Major Players in the Market
•Worth Mentioning…
 NII Holdings is the only telecom stock in the SIM
Market Cap: $ 2.2 Billion
Wireless industry
Page  9
Performance - Price
YTD Return: 1.3%
Page  10
Performance- Revenue
•Revenue up 4% last quarter
•Revenue up 3% last 12 months
Page  11
Dividend Yield
•Telecom Sector has the largest sector
dividend yield
•AT&T dividend yield: 5.4%
•Verizon dividend yield: 5.0%
Page  12
Business Analysis
Life Cycle
WirelessTelecom
TelecomBusiness
Businessis
isdeclining
growing
Wireline
•4G LTE Voice continuous decreases every
Wireline
•Smartphones
year
•Connected Devices
Page  14
Porter’s Five Forces
Buyer Power 
Moderate
• Little Differentiation
• High Switching Costs (Shortterm)
Supplier Power 
Moderate
• Specialized Inputs Needed
• Large Number of Suppliers
Threat of New Entrants
 Low
Threat of Substitutes 
High
• Very High Initial Capital
Requirements
• Heavily Regulated
• Wired and Wireless Devices Are
More Interconnected
• Rising Challenge from Internet
Based Communications
Providers
Degree of Rivalry 
High
Page  15
• Concentrated Industry With A
Few Major Players
• Saturated Market
• Competitors Must Steal Market
Share From Each Other
Important Factors
 Population Growth
 Cultural Trends
 International Market Growth
 Technology Innovation
– 4G in Saturated Markets
– 3G in Developing Markets
Page  16
Economic Analysis
What we are interested in?
S&P500
Driving
Force
Consumer
Confidence
/Spending
Demographics
Other
Relevant
Page  18
GDP
Business
Spending
Interest
Rate
Unempl
oyment
Correlation
with Overall
Economy
Cost Factor
Labor
Cost
Defensive Sector
Wireless has
Correlation
with
lower
Real
correlation,
GDP: 0.56
VersusINTEG
while
0.86 of
TELECOM
ConsumerSVC
Staples
with wireline business shows
more sensitivity to GDP. But Beta
shows the opposite.
INTEG Beta:0.72
Wireless Beta:1.2
Page  19
Moderate Sensitivity to Consumers Spending
But Confidence Matters.
Sector performance
Interestingly
within the
is moderately
sector,
industries response
differently to
correlated
to consumer
consumer sentiment.
confidence(r=.41)
Page  20
High correlation with Capital Spending
TelecomTELECOM
performance
alignswhich
with
INTEG
industry,
business
investment
capital
has
wireline
segment,inshows
projects,
specifically
capital
more
sensitivity
to capital
spending in communication
spending.
equipment
Page  21
Cost side
Interest Rate:
Wage Cost:
Different growth phase
Different pricing power
Page  22
Relevant but not significant.
Demographics
 Population
 Household formation rate
 Urbanization
Unemployment
One of the most
Population
Unemployment
growth
shows
regulated,
and negative
set
urbanization
entry
barrierbut
and
give
ensure
natural
correlation,
we
believeboost
it’s to
more
customer
competition
of a base,
sign
environment.
ofbut
weak
witheconomy.
You
penetration
still need
rate
a phone
reaching/over
to get an
interview.
100%, it matters less.
Regulation_(FCC)
 Entry barrier
 Spectrum auction
 Inter-carrier charge
 Anti-trust
 Subside service to rural area
Page  23
Financial Analysis
Top-down Overview
Sales Per Share
EBITDA Per Share
Cash Flow Per Share
Page  25
Fairly good
Margin
at historical
cash flow.
median with
potential
for improvement.
Stable revenue
growth
Margin Analysis
EBITA Margin
EBITA Margin Relative to S&P 500
Net Profit Margin Relative to S&P 500
Page  26
Net profit
EBITA
margins
margin
trending
below market
down but
still 1.5
due
to capital
times of
intensity.
the market
But the
cash flow should be fairly good.
Earning per share
Telecom
Within the sector, industry have
quite different story. Integrated
service has been relatively stable.
Wireless
Page  27
INTEG
Fluctuating historical growth, but
optimistic outlook
ROE
Telecom ROE relative to S&P 500
Telecom ROE Absolute
INTEG
Page  28
Again, industries
Sector
ROE at historical
vary greatly
low and
lower than
12.7%
vs. .7%
the S&P most of the
time
Wireless
Dividend
INTEG
Absolute: 5.5%
Relative: 2.74
Page  29
Wireless
Major Player_ATT
Revenue
EBITDA Margin relative to S&P: 1.7 Median
Net Profit Margin relative to S&P: 1.1 around Median
Return on Equity relative to S&P: 0.7 Median
Page  30
Major Player_Verizon
Revenue
EBITDA Margin relative to S&P: 1.2 around Median
Net Profit Margin relative to S&P: 0.6 around Median
Return on Equity relative to S&P: 1.0 around Median
Page  31
Valuation Analysis
Valuation Overview
Sector
Industry
Company
Absolute Basis
Telecom
Integrated Telecom
Wireless
AT&T
Verizon
Crown Castle
P/Trailing E
19.0
16.4
54.5
14.7
18.0
87.2
P/Forward E
19.3
14.8
43.6
13.5
15.6
67.6
P/S
2.0
2.0
1.5
1.5
1.0
7.6
P/B
1.2
1.3
0.9
1.8
3.1
6.5
P/CF
5.5
5.5
5.2
6.2
5.0
22.3
P/E ratio vary widely from Integrated Telecom to Wireless industries
Page  33
Sector
Page  34
Absolute Basis
High
Low
Median
Current
P/Trailing E
20.4
9.7
16.3
19.0
P/Forward E
20.1
10.5
15.6
19.3
P/B
P/S
P/CF
2.7
2.0
7.0
1.0
0.9
3.5
1.9
1.3
5.2
2.0
1.2
5.5
Relative to SPX
High
Low
Median
Current
P/Trailing E
1.4
0.7
0.9
1.4
P/Forward E
1.4
0.8
1.0
1.4
P/B
P/S
P/CF
1
1.4
0.6
0.4
0.8
0.4
0.8
1.0
0.5
0.9
1.0
0.6
Sector
• The valuations have expanded over the years
 high annual growth from Wireless Growth
 Broadband has provided high growth rate
• The valuations will expand for this group
 4G LTE will provide sustainable wireless growth rate
• The valuations may contract versus the market
 Other sectors may provide higher growth as the economy recovers
 Penetration rate passes 100%, wireless growth rate will slow down
 Problem Child: Wireline Voice
• P/S ratio is relatively low for a reason
 Capital EXP has been intensive in recent years (fiber build out)
Page  35
Industry - Integrated Telecom Services
Page  36
Absolute Basis
High
Low
Median
Current
P/Trailing E
18.1
9.1
14.5
16.4
P/Forward E
18.5
9.9
14.0
14.8
P/B
P/S
P/CF
3.4
2.0
7.2
1.0
1.0
3.5
2.0
1.3
5.2
2.0
1.3
5.5
Relative to SPX
High
Low
Median
Current
P/Trailing E
1.2
0.6
0.89
1.2
P/Forward E
1.2
0.7
0.92
1.1
P/B
P/S
P/CF
1.1
1.4
0.6
0.4
0.8
0.4
0.8
1.0
0.5
0.9
1.0
0.6
Industry – Integrated Telecom Services
• The valuations have expanded over the years
 high annual growth from Wireless Growth
 Broadband has provided high growth rate
• The valuations will expand for this group
 4G LTE will provide sustainable wireless growth rate
• The valuations may contract versus the market
 Penetration rate passes 100%, wireless growth rate will slow down
 Problem Child: Wireline Voice, Advertising Solutions
Page  37
Industry- Wireless Telecom Services
Page  38
Absolute Basis
High
Low
Median
Current
P/Trailing E
175.8
12.0
22.9
54.5
P/Forward E
286.6
14.6
22.7
43.6
P/B
P/S
P/CF
4.4
2.9
9.3
0.3
0.4
1.6
1.4
1.1
6.0
1.5
0.9
5.2
Relative to SPX
High
Low
Median
Current
P/Trailing E
9.4
0.8
1.4
4.1
P/Forward E
15.8
1.0
1.5
3.3
P/B
P/S
P/CF
1.4
1.9
0.9
0.2
0.5
0.2
0.6
0.8
0.6
0.7
0.7
0.6
Industry- Wireless Telecom Services
• The valuations has contracted
 The industry suffered from the economic downturn
 The industry did better than S&P 500 because of the prepaid svc.
• The valuations will expand for this group
 4G LTE will provide sustainable wireless growth rate
 The prepaid revenue will grow
• The valuations may remain the same versus the market
 Other sectors may provide higher growth as the economy recovers
 Penetration rate passes 100%, wireless growth rate will slow down
Page  39
Technical Analysis
Technical Analysis
Resistance Line
Support Line
Conclusion: Selling power decreases, buying power may emerge
Page  41
Recommendation
Recommendation
Our
Suggestion
SIM
1%
2%
S&P 500
3%
Why Telecom?
•
Given slow economic growth and uncertainty in Europe,
•
Defensive nature of the integrated telecom companies will provide diversification benefit
•
Stable high dividend yield assured, limited downside, high Treynor ratio.
•
Good to holding for 1-2 year period
Concern
•
Given our time horizon to invest, by the time of investing, there might be limited upside for
price appreciation.
Page  43
Recommendation
• Overweigh the Integrate Telecom Svc Industry
o Pros
 5.5% dividend yield
 Diversification Benefit
 High growth from the wireless business and broadband internet services
o Cons
 Wireline voice & Advertising have been problem children
• Underweight the Wireless Telecom Svc Industry
 Relatively high volatility
 Growth rate will slow down in the future because of high penetration rate
Page  44
Questions