Telecom Company Presentation
Jonathan Rice
Tianze Zhang
Xuan Zhao
Agenda
• Overview
• Verizon
• AT&T
• NII Holdings
• Recommendation
Page  2
Overview
Overview
•
•
Page  4
SIM is 200 basis points underweighted than S&P 500
The class gave the telecom sector 100 basis points to invest
Major Players Performance
Page  5
Current Holdings
NII Holdings
We decide to buy another 100 basis points of NIHD
Page  6
Verizon
Company Overview
－Verizon Communication Inc. is the holding company.
Owns 55% of Verizon Wireless, which is the largest wireless provider
and second large wireline business in this country
－The two, Verizon and AT&T, combined accounts for more than 60% of
market share in both wireless and wireline business.
－Stock Performance:
Current: $41.45
52 wk: $32.28 - 41.96
D
Forward P/E: 14.86
D
D
Defensive： Beta 0.55
D
Outperform market
+12.6% in last 1.5 month
Dividend Yield: 4.8%
Page  8
Line of business
Verizon
Communication
Verizon
Wireless
Service
Retail Postpaid
Wireline
Device
Consumer
Retail
Retail Prepaid
Global
Enterprise
Mass Market
Small Business
Strategic
Service
Global
Wholesale
Core
Operating Revenue of Two Segment ($ in Millions)
Wireline 39%
Wireless 61%
2010
Wireline 36%
Wireless 64%
2011
0
Page  9
20,000
Service revenue
40,000
Equipment
Other
60,000
Mass Markets
80,000
Global Enterprise
100,000
Global Wholesale
120,000
Other
Fundamental Strength
 Consolidation vs. Pure Player
– Scale effect
– Customer base
– Brand recognition
– Capital resource
– Synergy
– Diversification geography & service
 Close Game vs. Direct Competitor AT&T
– Network reliability and coverage
– Technology 4G
– Penetration and customer loyalty
– Margin: wireless and wireline
– Potential: time for the late bird
Page  10
Recent Catalysts: Earnings Earnings Earnings
 Strong earnings
 Connection addition
 Solid cash flow
 Improved margin
 Pricing strategy
 Video business launch
 Robust FiOS expansion
 Enterprise solution might recover
Flip side
 Wireline margin to be improved
 Negative effect from European economy for global enterprise business
 Capital expediture slowing down
Page  11
Segment Revenue
Segment Revenue of Past 5 Years
Million
25%
100,000
42,451
49,129
41,227
20%
44,323
15%
80,000
70,154
60,000
40,000
60,325
43,882
63,407
10%
5%
49,298
0%
-5%
20,000
-10%
-15%
2007
Page  12
2008
2009
2010
2011
Reconciling items
Wireline
Wireless
Wireless
Wireline
Profitability
Cost and Earning Structure
Million
18%
100,000
16%
14%
80,000
60,000
40,000
12%
Operating
Earnings
10%
D&A
8%
SG&A
6%
20,000
2%
0%
0
2007
Page  13
COS
4%
2008
2009
2010
2011
Earning Margin
DCF Projection
Verizon Key
Projection
Parameters
FY
FY
FY
2014E
2013E
2012E
Verizon DCF Results_Sensitivity
Discount Rate
Wireless
4.70%
5.70%
6.70%
Wireline
-0.50%
-0.50%
0.00%
2.94%
3.52%
4.20%
Total
Terminal Growth
Sales Growth
Operating Earnings Margin
Wireless
29%
30%
28.6%
Wireline
3.00%
3.20%
2.2%
17.26%
17.09%
16.68%
Total
Others
Effective Tax Rate
Capex as % of
Sales
18%
18%
18%
13.5%
14%
14.5%
Terminal
Discount Rate
FCF Growth Rate
Page  14
9%
2.5%
$41.50
8.5%
9.0%
9.5%
10.0%
10.5%
1.50%
41.17
38.73
36.59
34.70
33.02
2.0%
42.72
40.02
37.67
35.62
33.81
2.5%
44.53
41.50
38.91
36.66
34.68
3.0%
46.67
43.24
40.33
37.84
35.68
3.5%
49.23
45.29
42.00
39.21
36.82
4.0%
52.36
47.75
43.96
40.81
38.14
Verizon DCF Results_EPS
2014E
2013E
2012E
Model
$2.98
$2.99
$2.56
Consensus
$3.07
$2.77
$2.48
Multiple Valuation
Page  15
Final Rating: Hold
In our case: Not Buying
 Target Price = 60% DCF + 40% Multiples = 41.28
 Current Price = $41.45 > Target
 Promising business and cash generation
 Currently standing at 52 week high and slightly over target price
 Limited price upside, but stable dividend yield
 Defensive nature provide good diversification
 Might be appropriate if the price adjust back
Page  16
AT&T Inc.
Company Overview
 Formerly known as SBC communications
 Largest Market Capitalization: $ 199.7 Billion
 Second Largest Wireless Carrier
 103.2 million wireless subscribers
 29.6% market share of the wireless market
Page  18
Lines of Business




Wireless Segment
Wireline Segment
Advertising Solution
Other
Page  19
Key Stats
Diluted Shares Outstanding: 5950 Million
52 Week Price Range: $27.29-$33.94
Current Price: $33.69
Dividend Yield: 5.20%
Page  20
Performance
Page  21
Price Affecting Factor
 Large amount of dividends: $1.76 per share expected
 High dividend yield: 5.2%
 Aggressive share buyback plan: 67.7 million shares in Q1 2012
Page  22
Price Affecting Factor
Wireless Data Business
Page  23
Price Affecting Factor
U-verse & Strategic Business Solution
Wireline Voice and Advertising Solution are Problem Children
•
Page  24
AT&T sold Advertising Solution in May
Financial Analysis- Historical
Current Ratio, D/E Ratio & ROE
Page  25
Financial Analysis- Historical
Page  26
Financial Analysis-Peer Firm
Page  27
Projections
Sales growth rate will be around 1.6% in the future
Operating Margin will be back to a high level and I predict it to be around
20%
AT&T will continue increase CAPEX in 2012 because of the optical fiber
and construction of infrastructure
However, CAPEX will reach peak in 2012 and start to decrease afterward
My estimate for EPS is higher than the consensus because I think the
rapid growth from the wireline data will offset some losses from the
wireline voice, making the growth rate of wireline business larger
Page  28
AT&T
2012
2013
2014
Expected EPS
$2.55
$2.75
$2.87
Consensus EPS
$2.38
$2.56
$2.75
DCF- Sensitivity Analysis
Discount Rate
Terminal Growth Rate
Page  29
Stock Price
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
6.00%
7.00%
8.00%
9.40%
10.00%
11.00%
12.00%
$48.73
$41.56
$36.20
$30.62
$28.72
$26.00
$23.74
$51.44
$43.37
$37.46
$31.43
$29.39
$26.51
$24.14
$54.70
$45.49
$38.91
$32.33
$30.14
$27.08
$24.57
$58.68
$47.98
$40.57
$33.35
$30.98
$27.70
$25.04
$63.66
$50.98
$42.51
$34.50
$31.93
$28.39
$25.56
$70.06
$54.64
$44.81
$35.82
$33.00
$29.17
$26.14
$78.60
$59.21
$47.56
$37.35
$34.22
$30.04
$26.78
Multiple Valuation
Page  30
AT&T
High
P/Forward E
P/S
P/B
P/EBITDA
P/CF
14.70
3.30
2.30
9.46
9.80
Low
Median Current
12.10
13.80
9.10
1.60
1.20
1.40
1.90
1.60
1.40
3.29
4.18
4.59
6.30
5.20
3.90
Multiple Target Price
Target
Target
Target
Multiple Per Share Price
$2.55 $34.43
13.50
1.50
$21.90 $32.85
$17.86 $32.15
1.80
4.30
$7.32 $31.48
$5.64 $33.84
6.00
$32.95
Recommendation
Page  31
NII Holdings.
NIHD
 Company Overview
– Latin American wireless
52 Week Stock Price
communications provider
-- Formerly known as Nextel
International Inc.
-- Headquartered in VA
-- SIM currently owns 9000 shares with a loss of 49.98%
-- Competitors – America Movil and Telefonica Moviles
Page  33
Lines of Business
Brazil
Mexico
4,000,000
2,500,000
3,000,000
2,000,000
1,500,000
2,000,000
1,000,000
1,000,000
500,000
-
2007
2008
2009
2010
2007
2011
2008
2009
2010
Peru
Argentina
Corporate
800,000
400,000
40,000
600,000
300,000
30,000
400,000
200,000
20,000
200,000
100,000
10,000
-
Page  34
-
2007
2008
2009
2010
2011
2011
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
Key Stats
Current Price
$11.20
Market Cap
$1.92B
Shares Outstanding
52 Week Price
Range
Revenue FYE 2011
Operating Margin
173M
$10.33 – $44.05
$6.72B
13.5%
D/E
1.41
Current Ratio
2.19
Page  35
Q1 2012
(in thousands of $)
Q1 2012
Q1 2011
% Growth
Brazil
821,280
813,338
0.98%
Mexico
544,462
567,006
(3.98%)
Argentina
168,517
150,714
11.81%
Peru
88,788
85,657
3.66%
Corporate
8,174
7,405
10.38%
Page  36
2012 Revenue Projections
(in thousands
of $)
Q1 2012
Actual
Q2 2012
Projected
Q3 2012
Projected
Q4 2012
Projected
2012
Projected
Total
Brazil
821,280
821,280
821,280
985,536
3,449,376
Mexico
544,462
544,462
544,462
653,354
2,286,740
Argentina
168,517
165,146
171,481
220,436
725,580
Peru
88,788
82,371
85,290
110,625
367,073
Corporate
8,174
8,206
8,537
8,393
33,310
Total
1,631,221
1,621,465
1,631,050
1,978,344
6,862,080
Analyst
Estimates
1,631,221
1,640,000
1,670,000
1,828,779
6,770,000
Page  37
Revenue Growth
(in
thousands
of $)
Revenue
Revenue
Growth
(YoY)
2014
2013
2012
2011
2010
2009
2007
8,482,981 7,617,104 6,862,080 6,719,344 5,601,316 4,397,599 4,269,380 3,296,295
11.37%
11.00%
2.12%
19.96%
27.37%
3.00%
Total Rev Growth
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2007
Page  38
2008
2008
2009
2010
2011
2012
2013
2014
29.52%
39.01%
DCF Assumptions
 Discount Rate – 12.00%
 Long-Term Growth Rate – 4.50%
 Operating Margin – 11% of Revenues
 Long-Term CapEx Rate – 10% of Revenues
 Interest Expense – 4.50% of Revenues
 Other Expense – 0.80% of Revenues
Page  39
Sensitivity Analysis
Page  40
Multiples Approach
Page  41
Technical Analysis
Page  42
Recommendation
•
•
•
•
One-year price target of $19.03 (70% upside)
DCF Valuation of $18.26 (63% upside)
Multiples Valuation of $19.42 – $21.21 (73% - 89% upside)
Technical Analysis near lower Bollinger band
BUY 100 bp of NIHD
Page  43
Recommendations
Recommendation
NIHD
NIHD
2%
1%
Original Position
Page  45
Recommendation
Questions
Appendix- Verizon
Page  47
Appendix-AT&T
Terminal Discount Rate =
Terminal FCF Grow th =
Year
2012E
Revenue
128,716
% Grow th
1.57%
Operating Income
24,465
Operating Margin
Interest Expense
Interest % of Sales
Equity in Net Income of Affiliates
% of Sales
Other Income (Expense) net
% of Sales
Taxes
% of Sales
Net Income Attibutable to AT&T
Subtract Cap Ex
Debt
Cash
Cash/share
Total Assets
Debt/Assets
Working Capital % of Grow th
Page  48
1.6%
28,755
143,070
1.5%
29,186
145,359
1.6%
29,653
147,394
1.4%
30,068
149,605
1.5%
30,519
(3,733)
(3,917)
(4,113)
(4,179)
(4,241)
(4,301)
(4,370)
(4,435)
(4,506)
(4,569)
(4,638)
-2.9%
-3.0%
-3.1%
-3.1%
-3.1%
-3.1%
-3.1%
-3.1%
-3.1%
-3.1%
-3.1%
772
783
796
809
821
832
846
858
872
884
898
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
257
522
398
135
137
139
141
143
145
147
150
0.2%
0.4%
0.3%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
7,191
31.0%
7,416
31.0%
7,522
31.0%
7,635
31.0%
7,741
31.0%
7,865
31.0%
7,983
31.0%
8,111
31.0%
8,225
31.0%
8,348
31.0%
(257)
(261)
(265)
(404)
(410)
(416)
(423)
(429)
(436)
(442)
(449)
-0.2%
-0.2%
-0.2%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
15,744
18,673
16,241
3.2%
18,973
16,338
0.6%
19,276
16,583
1.5%
19,565
16,815
1.4%
19,839
17,084
1.6%
20,157
17,340
1.5%
20,459
17,617
1.6%
20,786
17,864
1.4%
21,077
18,132
1.5%
21,393
14.3%
14.3%
14.3%
14.3%
14.3%
14.3%
14.3%
14.3%
14.3%
508
(65)
(73)
(270)
(274)
(139)
(141)
(143)
(145)
(147)
(150)
0.4%
0.0%
-0.1%
-0.2%
-0.2%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
20,239
15.5%
14,502
7.6%
104,153
94,271
198,425
6.73%
13.6
13.4
6.1
6.1
5,950
$
$
28,302
140,955
20.4%
% Grow th
Shares Outstanding
1.4%
20.4%
13,481
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
27,911
138,736
2022E
20.4%
16.0%
Free Cash Flow
1.5%
2021E
20.4%
20,595
Capex % of sales
27,499
136,820
2020E
20.4%
14.3%
% of Sales
1.6%
2019E
20.4%
18,406
Plus/(minus) Changes WC
26,841
134,798
2018E
20.4%
6.7%
% of Sales
1.61%
2017E
20.4%
14,759
Add Depreciation/Amort
Current Price
Implied equity value/share
Upside/(Dow nside) to DCF
25,807
132,675
2016E
20.2%
% Grow th
NPV of Cash Flow s
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
1.45%
2015E
19.8%
31.0%
Net Income Attibutable to Noncontrolling Interest
130,577
2014E
19.0%
6,746
Tax Rate
2013E
9.4%
1.5%
33.69
33.35
-1.0%
64,750
3,185
0.54
270,344
24.0%
3%
19,901
15.0%
15,479
6.7%
52%
48%
100%
18,872
14.0%
16,440
6.2%
19,292
14.1%
16,583
0.9%
19,700
14.2%
16,815
1.4%
20,016
14.2%
17,084
1.6%
20,173
14.1%
17,449
2.1%
20,641
14.2%
17,617
1.0%
21,077
14.3%
17,752
0.8%
Terminal Value
Free Cash Yield
12.7
12.6
5.9
5.8
12.3
12.2
5.7
5.7
14.3%
21,393
14.3%
18,018
1.5%
231,501
7.78%
Terminal P/E
12.8
Terminal EV/EBITDA
5.6
Appendix-NII Holdings
Page  49