TELECOMMUNICATIONS SECTOR ANALYSIS
Ankita Agarwal
Jackie Gleason
Jason Stegall
AGENDA
Sector Overview
Analysis
• Business Analysis
• Economic Analysis
• Financial Analysis
• Valuation Analysis
Recommendation
Portfolio
Weights
Name
Financials
SIM Portfolio
Percentage
Market
Over/Under
S&P
15.22%
17.57%
2.35%
3.20%
3.34%
0.14%
17.79%
15.82%
(1.97%)
10.65%
9.07%
(1.58%)
10.60%
11.71%
1.11%
Information
Technology
Telcom
Information
Technology
Consumer
Discretionary
Consumer
Staples
Consumer
Discretionary
Energy
12.68%
10.87%
(1.81%)
Industrials
11.02%
10.11%
(0.91%)
Healthcare
11.80%
9.85%
(1.95%)
Materials
3.66%
3.28%
(0.38%)
Utilities
3.38%
5.97%
2.59%
Cash
0.00%
2.40%
2.40%
Total
100.00%
100.00%
Financials
Telcom
Consumer Staples
TELECOM
Sector Overview
Industries
Integrated Telecommunication Services
The Integrated Telecommunications Services industry consists
of companies engaged in providing telecommunication services
other than wireless. The industry includes integrated providers
of both fixed-line and wireless services offering voice, data and
high-density data transmission services.
Wireless Telecommunication Services
The Wireless Telecommunications Services industry consists of
companies engaged in providing wireless communication
services, such as paging, cell phone and other satellite
telecommunication services. The industry excludes cable
television services utilizing satellite delivery.
Integrated Telecomm. Services
• AT&T
• Verizon Communications
• Chunghwa Telecom Co. Ltd
• BCE
Wireless Telecomm. Services
• NII Holdings
• American Tower
Corporation
• SBA Communications
• Vodafone
• Telefonica
• Bharti Airtel Limited
TELECOM
Largest Companies
Current Position:14 Bps Overweight
Current Holdings:
NII Holdings (NII)
Return: $193,536
Prospective Companies:
SBA Communications (SBAC)
American Tower Corporation (AMT)
TELECOM
Current Position Information
BUSINESS ANALYSIS
Traditional Land-lines are mature, however there are horizontal
growth opportunities (DSL, UVERSE, etc)
Wireless service is still up and coming especially in foreign
markets (Like NIHD and AMT)
Heavy Capital Expenditure needed to maintain international
growth, existence of economies of scale
Typically growth follows upgrades to network. Smaller
companies can handle upgrades better because they have
smaller network.
TELECOM
Lifecycle
User:
Anyone, everyone these days seem to use cell phones, even
the Amish. Cell phones connect people without the added cost
of physical assets such as copper wiring, substations, even
infrastructure in general.
Geography:
Everywhere in the world Telcom has been on the margin of
business since the 1800s. From the telegraph, to the phone, to
the modem, to the cable/wireless structure we have today.
Telcom is the hare, and as such needs to evolve with the
shrinking world.
TELECOM
The user and geography
Political Headwinds:
President Obama’s State of the Union address identified a
national broadband network as a national goal, and wireless is
the future of broadband.
Currency Exposure:
Most of the businesses in our analysis are U.S. companies that
are susceptible to fluctuations in the dollar. Given the current
environment this could be mitigated by currency swaps,
however, there would be a large transaction cost for this
position. This could also be over-come by synthetic portfolios
or simply by investing in a variety of countries and balancing
based on inflationary pressures.
TELECOM
External Factors
Barriers to
Entry
Suppliers are
varied with none
holding key
technology
(High)
Supplier
Power
(Low)
Competition
within the
Industry
(High)
The market is starting to
mature and companies are
competing for market share
Technology always
presents a risk that a new
product will change the
market
Substitutes
(Moderate)
The sector is very
capital intensive and
entry is governed by
the FCC
Buyer
Power
(Moderate)
Buyers are the end
use customers and
have moderate
power
TELECOM
Five Forces Analysis
ECONOMIC ANALYSIS
The telecom sector is a defensive sector.
• Little correlation between sector performance and the GDP
TELECOM
GDP vs. Telecom
S&P 500 EPS vs. Telecom
The telecom sector is a defensive sector.
• Counter cyclical correlation between sector performance and the EPS of the
S&P 500
The high r-value indicates that telecom performance aligns with business investment
in capital projects.
• r-value is very close to that for the Integrated Telecom Service Industry
• The r-value is much lower for the Wireless Telecom Service Industry
TELECOM
Business Capital Spending vs. Telecom
While consumer spending influences sector value, it is only moderately correlated.
• It is important to note that the r-value for the Wireless Telecom Service Industry
is 0.70, indicating that consumer spending on wireless devices and services drives
industry value.
TELECOM
Consumer Spending vs. Telecom
The r-value reflects some influence of treasury rates on this capital intensive industry.
TELECOM
10-Year Treasury Yield vs. Telecom
FINANCIAL ANALYSIS
TELECOM
Estimated Changes
TELECOM
Estimated Changes
TELECOM
Future Earnings Outlook
Earnings Surprise
Earnings Surprise
SBAC
AMT
NIHD
Dividend Yield
Dividend Yield
EBITDA, Nat Profit Margin and ROE
TELECOM
Telecom ROE Outlook
Return on Equity
Return on Equity
relative to S&P500
VALUATION ANALYSIS
TELECOM
Telecom Sector Valuation Ratios
Trailing P/E
High
26.7
Low
9.7
Median
16.3
Current
17.8
Forward P/E
32.8
10.5
15.6
16.5
Price to Book
2.7
1.0
1.9
1.8
Price to Sales
2.1
0.9
1.4
1.2
Price to Cash Flow
8.5
3.5
5.4
5.5
TELECOM
Telecom Sector Valuation Ratios vs. S&P 500
Trailing P/E
High
1.3
Low
0.68
Median
0.93
Current
1.2
Forward P/E
1.4
0.77
0.96
1.2
Price to Book
1.0
0.4
0.7
0.8
Price to Sales
1.4
0.8
1.0
0.9
Price to Cash Flow
0.7
0.4
0.5
0.6
TELECOM
Integrated Telecom Industry Valuation Ratios
Trailing P/E
High
2.0
Low
9.1
Median
14.7
Current
14.5
Forward P/E
22.4
9.9
14.3
13.9
Price to Book
3.4
1.0
2.0
1.8
Price to Sales
2.0
1.0
1.4
1.2
Price to Cash Flow
7.6
3.5
5.4
5.2
TELECOM
Integrated Telecom Industry Valuation Ratios vs. S&P 500
Trailing P/E
High
1.1
Low
0.58
Median
0.86
Current
1.0
Forward P/E
1.1
0.68
0.89
0.99
Price to Book
1.1
0.4
0.8
0.8
Price to Sales
1.4
0.8
1.0
0.9
Price to Cash Flow
0.6
0.4
0.5
0.5
TELECOM
Wireless Telecom Industry Valuation Ratios
Trailing P/E
High
175.8
Low
12.0
Median
22.9
Current
NM
Forward P/E
286.6
14.6
22.7
NM
Price to Book
10.2
0.3
1.4
2.0
Price to Sales
3.0
0.4
1.2
1.1
Price to Cash Flow
33.3
1.6
6.1
8.3
TELECOM
Wireless Telecom Industry Valuation Ratios vs. S&P 500
Trailing P/E
High
9.4
Low
0.78
Median
1.40
Current
NM
Forward P/E
15.8
0.95
1.50
NM
Price to Book
2.7
0.2
0.6
0.9
Price to Sales
1.9
0.5
0.8
0.8
Price to Cash Flow
2.4
0.2
0.6
0.9
RECOMMENDATIONS
We recommend an increase to overweight by at least 100 basis points. We
believe the integrated market provides a good value play and is
underserved by the current portfolio. In addition, existing providers can
increase margin by providing additional service options. After longer periods
of time, bandwidth will become commoditized and overall return will slow.
Areas for expansion:
Infrastructure/Newer Technologies (4G, LTE, WiMax, VOIP)
Emerging Markets
Subscription Based Services
TELECOM
Recommendation
•Lucrative upside
•Defensive
•Fashionable (IPhone)
•Exposure to information (access to call records,
etc. Important and costly information for
lawyers).
•Access to new markets/younger user base.
•Emerging Technologies
•Bring everyone closer together.
TELECOM
Reasons We Like Telcom
QUESTIONS?