Kevin Neilon
Zhenjiao Tian
Overview
Wireless Telecom
Services
Integrated
Telecom Services
• Cell phone
• Satellite
• Paging
• Non-wireless
• Voice
• Data
Overview
SIM Weight
S&P 500 Weight
96.47%
97.27%
2.73%
Rest of S&P 500
Telecom Sector

3.53%
Rest of S&P 500
Telecom Sector
Decided to cut 200 basis points to 1.53%
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
Overview

Negatives
 Sector is not capturing upside of market recovery
 ROE & Profit margin expected to continue
underperforming
 Industry is not attractive based on 5 forces

Positives
 High dividend yield
 Wireless Services Industry slightly undervalued
Overview

Current Holdings
AT&T
•
•
•
•
Current Price: $30.99
Target Price: $31.50 (1.6% upside)
Current SIM Weight: 1.97%
Recommendation: SELL
NII Holdings, Inc.
•
•
•
•
Current Price: $17.50
Target Price: $22.35 (28% upside)
Current SIM Weight: 1.56%
Recommendation: HOLD
Overview

Another option to consider:
MetroPCS
• Market Cap:$4.3B
• Current Price: $10.28
• Target Price: $13.35 (29.8% upside)
AT&T
Defensive Stock
 Mature Company
 Competitors: Verizon, Sprint

Revenue by Line of Business
Wireless
45%
Other
1%
Wireline
51%
Advertising
3%
AT&T

Private Communications Construction
AT&T

Correlation with Market
AT&T
 Slow, unexciting growth prospects
AT&T

ROE
AT&T

DCF Model
AT&T

Valuations Method
Revised Target Price: $31.50
Current Price: $30.34
Recommendation: SELL
AT&T

Valuations Method
Revised Target Price: $31.50
Current Price: $30.99 (1.6% upside)
With Dividends: 7.4% 1 Year Return
Recommendation: SELL
NII Holdings, Inc.
 Founded in 1995 and is based in Reston, Virginia.
 Provides wireless communication services under the Nextel brand name
 Primary market is Mexico, Brazil, Argentina, Peru, and Chile.
 Services include mobile telephone service; mobile broadband services;
Nextel Direct Connect service, which allows subscribers to talk to each
other on a push-to-talk basis for private one-to-one calls or on group
calls; and International Direct Connect service that allows subscribers to
communicate across national borders.
 Provides data services.
 Market Capital: 3.0 billion
Competitors: America Movil, Telefonica Moviles, Telemar’s 0i, Telecom
Italia Mobile, Entel, Iusacell, Vivo, Portugal Telecom S.A, Telecom
Americas, Italia Mobile
NII Holdings, Inc.
 5 Year Performance:
NII Holdings, Inc.

BUSINESS ANALYSIS
 Business cycle: growth company
 Business strategy: product
expansion, regional expansion and
new technology
 Driving force for sale and catalyst:
Push-to-Talk, 3G network and
regional expansion
 Porter’s Five Forces: high barrier to
enter, high substitution threat, high
buyer power, medium supplier
power, high Rivalry
 Business risk: Country risk, foreign
exchange rate, credit default risk
and product and technology
obsolete risk.
FINANCIAL ANALYSIS
NII Holdings, Inc.

FINANCIAL ANALYSIS
 More than 84% of the total revenue
come from Brazil and Mexico.
 Future revenue is estimated to
continue to increase and driving
forces are below:
 Launch of high performance
push-to talk on new W-CDMA
network in Peru.
 Launch of 3G services across
most of its markets.
 Creation of additional
distribution presence and
enhancement of brand.
NII Holdings, Inc.

FINANCIAL ANALYSIS
 Current earnings in Argentina, Peru and
Chile is negative.
 Consolidated earnings in the third
quarter and fourth quarter are negative
and main reasons are below.
 Increased cost relating to
deployment of new W-CDMA base
networks
 High cost from launch of its new
brand
 depreciation of local currencies
relative to dollars
 Higher cost associated with
customer retention driven by
competition
NII Holdings, Inc.

FINANCIAL ANALYSIS
NII Holdings, Inc.

Valuations Method
NII Holdings, Inc.
NII Holdings, Inc.

DCF Model
Terminal Discount Rate =
Terminal Cash Flow Growth Rate =
12.0%
4.5%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
2,170
1,564
3,734
13.06%
58%
42%
100%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
EBIDTA/share
15.0
18.7
3.8
4.2
9.4
10.3
12.8
3.2
3.6
11.2
Shares Outstanding
171
Current Price
Implied equity value/share
Upside/(Downside) to DCF
$
$
17.50
21.81
24.7%
Terminal Discount Rate
10.5%
11.0%
Terminal 6.0%
FCF
growth
5.5%
rate
31.3
28.5
26.2
24.3
22.6
29.5
27.0
25.0
23.3
21.9
5.0%
27.9
25.8
24.0
22.5
21.2
4.5%
26.7
24.8
23.2
21.8
20.6
4.0%
25.6
23.9
22.5
21.2
20.1
24.7
23.2
21.8
20.7
19.6
3.5%
11.5% 12.0% 12.5%
NII Holdings, Inc.
 SUMMARY OF VALUATION
Weighted average: $22.88 + 0.5 * $ 21.81 =$ 22.35
Current Price
$
17.50
Implied equity value/share
$
22.35
Upside/(Downside)
28%
 Other analysts’ opinions as of 03/02/2012 (provided by Thomson/First
call):
Mean Recommendation (this week):
2.3
Mean Recommendation (last week):
2.2
Change:
0.1
NII Holdings, Inc.
 Recommendations
Negatives:
Net loss in consecutive two quarters of 2011
attributed to high costs
More intense competitive environment
Depreciating local currency values.
 High LT debt to total capital: 50%
Positives
The famous Nextel brand name
High market shares and fast revenue growth
Sunk cost in 2011 related to the deployment of
3G networks
High upside about 28%.
Recommendation: Hold
MetroPCS
Wireless telecom provider
 Low-cost, no-contract services
 Added 1m+ customers each of past 6 years

 Client base expected to pass 10m in 2012
 Focus on high density metropolitan areas

Competition: Boost Mobile, TracFone, and
new services from AT&T and Verizon
MetroPCS

5 Year Performance
MetroPCS

2 Year Performance
MetroPCS
Went public in 2007 near S&P 500 peak
 Stock took a hit when economy turned
sour
 Has outperformed market in last 2 years
during market recovery

MetroPCS

ROE Absolute:
MetroPCS

ROE Relative to Sector:
MetroPCS

EPS
MetroPCS

EPS Growth Relative to S&P 500
MetroPCS

EBITDA Margin Relative to S&P 500
MetroPCS

Positives:
 Strong, steady growth projected
 We expect ROE to outpace sector
 $2.2B (23%) of Assets made up of Cash and
Short Term Assets (Sector Average is 4%)
 Considered a top candidate for M&A deal

Risks:
 Increasing competition could squeeze margins
 New rebate program to attract new customers
 Government regulation and spectrum limits
MetroPCS

Valuation Multiples
MetroPCS

DCF Model
MetroPCS

Price Sensitivity Analysis
In line with expert 1 year target estimate of $13.13
MetroPCS

Technical Analysis
Recommendations
AT&T
NII Holdings
Total
Current SIM
Weight
1.97%
1.56%
3.53%
Recommended
SIM Weight
0.00%
1.56%
1.56%
Consider adding MetroPCS in future
Questions?
Appendix

T DCF
Appendix

NIHD DCF
Year
2011E
Revenue
6,719
2012E
7,727
% Growth
2013E
8,423
15.0%
Operating Income
831
Operating Margin
970
12.4%
Interest and Other
288
Interest % of Sales
12.6%
8.8%
Taxes
343
Tax Rate
199
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
12.0%
12.0%
12.0%
12.0%
1,179
8.0%
201
36.0%
337
5.5%
1,769
12.0%
8.0%
36.0%
317
14,738
1,118
190
2021E
6.0%
1,676
1,054
8.0%
36.0%
296
13,970
1,581
178
2020E
6.5%
12.0%
8.0%
36.0%
275
13,179
990
167
2019E
7.0%
1,485
925
8.0%
36.0%
255
12,374
1,388
155
2018E
7.5%
12.0%
8.0%
36.0%
270
11,565
861
143
2017E
8.0%
1,291
797
8.0%
36.0%
433
10,758
1,195
152
2016E
8.5%
12.6%
7.0%
36.0%
9,961
734
243
292
% Growth
Add Depreciation/Amort
15.1%
6.6%
2015E
9.0%
1,157
592
164
36.0%
Net Income
9,181
9.0%
1,268
514
2014E
8.0%
212
36.0%
358
36.0%
377
46.6%
48.2%
-37.5%
-5.7%
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
786
943
1,036
1,102
1,195
1,291
1,388
1,485
1,581
1,676
1,769
11.7%
12.2%
12.3%
12.0%
12.0%
12.0%
12.0%
12.0%
12.0%
12.0%
12.0%
206
138
95
46
(40)
(43)
(46)
(49)
(53)
(56)
(59)
3.1%
1.8%
1.1%
0.5%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
800
896
943
1,102
1,195
1,291
1,388
1,485
1,581
1,676
1,769
Capex % of sales
11.9%
11.6%
11.2%
12.0%
12.0%
12.0%
12.0%
12.0%
12.0%
12.0%
12.0%
Free Cash Flow
391
476
621
316
215
232
250
267
285
302
318
21.7%
30.3%
-49.0%
-32.0%
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
Terminal Value
4,393
Free Cash
Yield
7.25%
Terminal P/E
11.6
% Growth
NPV of Cash Flows
2,060
60%
NPV of terminal value
1,394
40%
Projected Equity Value
3,453
100%
Free Cash Flow Yield
12.51%
Current P/E
15.7
Projected P/E
17.3
Current EV/EBITDA
3.9
Projected EV/EBITDA
EBIDTA/share
4.1
9.2
Shares Outstanding
175
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
$
$
Terminal
EV/EBITDA
17.88
19.73
10.4%
4,870
1,770
17.88
22.14
23.8%
2.1
Appendix

PCS DCF