Kevin Neilon
Zhenjiao Tian
Agenda
Overview
 Business Analysis
 Economic Analysis
 Financial Analysis
 Valuation Analysis
 Recommendation

Overview
S&P 500 Weight
96.47
%
SIM Weight
97.27%
2.73%
Rest of S&P 500
Telecom Sector


3.53%
Rest of S&P 500
Telecom Sector
SIM portfolio is 80 basis points overweight
We recommend cutting 100 bps to slightly underweight
Overview
Wireless Telecom
Services
Integrated
Telecom Services
• Cell phone
• Satellite telecom
services
• Paging
• Non-wireless
• Voice
• Data
Overview
Market Cap - $107.4B
Market Cap - $137.8B
Market Cap - $177.7B
Market Cap - $201.9B
Overview
Sector Performance 1 Year:
Absolute: -0.1%
Vs. S&P500: -0.2%
Overview
Sector Performance YTD:
Absolute: -2.2%
Vs. S&P500: -8.1%
Overview
Dividend Yield is major source of returns
 Telecom: $5.09/share
 Energy: $9.88
 Cons Staples: $9.71
 Health Care: $8.80
 Utilities: $7.28
 Cons Disc: $4.76
 Info Tech: $4.37
 Financials: $3.08
Business Analysis
Mature Phase of Business Life Cycle
• Growth opportunities in video and data
communications
Defensive Business Cycle
• Sector Average Beta of 0.76
• Fairly stable through expansionary and
contractionary economic conditions
Business Analysis
Recent Trends:
Smartphone users increased 140% since 2009
• Demand for data plans substantially increased
• Margins on devices have decreased
Push toward more 4G network coverage
Heightened Federal Regulation
• Government interference with proposed mergers
• More policing of airwaves
Business Analysis

Porter’s 5 Forces
Buyer Power
(Moderate)
• Little differentiation
• High short term switching costs
Supplier Power
(Moderate)
• Specialized inputs needed
• Fairly large number of suppliers
Threat of New
Entrants (Low)
• Very high initial capital requirements
• Heavily restricted and regulated
Business Analysis

Porter’s 5 Forces
Threat of
Substitutes
(High)
• Wireless and wired devices becoming
more interconnected and
interchangeable
• Next challenge could come from internet
based communications providers (VOIP,
etc.)
Degree of
Rivalry
(High)
• Concentrated industry with a few major
players
• Saturated market means competitors
must steal market share or entice current
customers to purchase upgrades
Economic Analysis
Economic Analysis
Economic Analysis
Financial Analysis

Telecom Sector

Revenue and earning per share
Financial Analysis

Telecom Sector

ROE is below market on average
Financial Analysis

Telecom Sector
 Profit margins declining
Absolutely and relative to S&P 500
Financial Analysis

Telecom Sector

Net creator of cash – Cash flow per share
Financial Analysis

Wireless Services Industry

Revenues and earnings per share
Financial Analysis

Wireless Services Industry

Return on equity and relative to S&P 500
Financial Analysis

Integrated Telecom Services Industry

Revenues and earnings per share
Financial Analysis

Integrated Telecom Services Industry

Return on equity and relative to S&P 500
Financial Analysis

Major player in the sector - NIHD

Revenues and earnings per share
Financial Analysis

Major player in the sector – AT&T

Revenues and earnings per share
Financial Analysis

Major player in the sector – Sprint Nextel

Revenues and earnings per share
Valuation Analysis

Telecom Sector: Forward P/E
Valuation Analysis

Forward Looking P/E relative to S&P 500
Valuation Analysis

Telecom Sector
Absolute Basis
High
Low
Median
Current
P/Trailing E
24.8
9.7
16.3
16.6
P/Forward E
21.7
10.5
15.6
17.5
P/B
P/S
P/CF
2.7
2.0
7.0
1.0
0.9
3.5
1.9
1.4
5.2
1.7
1.2
5.0
Relative to
SP500
High
Low
Median
Current
P/Trailing E
1.4
0.7
0.9
1.2
P/Forward E
P/B
P/S
P/CF
1.4
1.0
1.4
0.6
0.8
0.4
0.8
0.4
1.0
0.8
1.0
0.5
1.3
0.8
0.9
0.5
Financial Analysis

Integrated telecom services
 ROE Relative to S&P 500
Valuation Analysis

Integrated Telecom Services
Absolute Basis
High
Low
Median
Current
P/Trailing E
18.9
9.1
14.4
14.4
P/Forward E
18.5
9.9
14.0
13.9
P/B
P/S
P/CF
3.4
2.0
7.2
1.0
1.0
3.5
2.0
1.4
5.2
1.8
1.2
5.2
Relative to
SP500
High
Low
Median
Current
P/Trailing E
1.2
0.6
0.9
1.1
P/Forward E
1.2
0.7
0.9
1.0
P/B
P/S
P/CF
1.1
1.4
0.6
0.4
0.5
0.4
0.8
1.0
0.5
0.8
1.0
0.6
Valuation Analysis

Wireless Telecom Services: Forward P/E
Valuation Analysis

Wireless Telecom Services: Trailing P/E
Valuation Analysis

Wireless Telecom Services
Absolute Basis
High
Low
Median
Current
P/Trailing E
175.8
12.0
22.9
NM
P/Forward E
286.6
14.6
22.7
NM
4.4
2.9
9.3
0.3
0.4
1.6
1.4
1.1
6.1
0.6
0.8
2.3
Relative to
SP500
High
Low
Median
Current
P/Trailing E
9.4
0.8
1.4
NM
P/Forward E
15.8
1.0
1.5
NM
P/B
P/S
P/CF
1.4
1.9
0.9
0.2
0.5
0.2
0.5
0.8
0.6
0.3
0.7
0.3
P/B
P/S
P/CF
Technical Analysis


Recently passed through 20 & 50 Day SMA
Expect resistance on 100 Day SMA and then to remain
stable
Recommendations

Negatives
 Sector is not capturing upside of market recovery
 ROE & Profit margin expected to continue
underperforming
 Industry is not attractive based on 5 forces
 Technical analysis suggests short term decline

Positives
 High dividend yield
 Wireless Services slightly undervalued
Recommendations

Trim 100 bps from Overweight to Underweight
Current SIM Weight
Recommended
Weight
Market Weight
3.53%
2.53%
2.73%
Integrated Services: Underweight
 Wireless Services: Market Weight

 Based on individual opportunity
Questions?