Telecommunications Sector
Presentation
May 10, 2011
Jiang Zhu
Tim Williamson
Agenda
• Sector Overview
• Analyses:
o Business
o Economic
o Financial
o Valuation
• Conclusion
• Recommendations
Sector Overview
Sector
S&P 500 Weight
SIM Weight
+/-
Consumer Discretionary
10.60%
10.61%
0.01%
Consumer Staples
10.42%
8.16%
-2.25%
Energy
13.09%
11.04%
-2.04%
Financials
15.47%
13.62%
-1.85%
Health Care
11.27%
10.39%
-0.88%
Industrials
11.23%
11.09%
-0.13%
Information Technology
18.07%
22.75%
4.69%
Materials
3.66%
3.09%
-0.57%
Telecommunication Services
2.98%
4.19%
1.21%
Utilities
3.23%
2.26%
-0.97%
Cash
0.00%
2.71%
2.71%
Dividend Receivables
0.00%
0.08%
0.08%
100.00%
0.00%
100.00%
Sector Information
Industry Information
Name
Current Market Weighing
Market Cap
Telecom Services-Foreign
498B
Telecom Services-Domestic
382B
Wireless Communications
27,220B
SIM Weighting
Telecom
2.98%
Others,
97.02%
Telecom
Services:
4.19%
SIM Holding Information
Name
Market Cap
NII Holdings, Inc.
7.1B
Total
7.1B
Largest Companies
Wireless Communications
Telecom Services-Domestic
Name
Market Cap
Name
Market Cap
Telefonica, S.A.
7899.4b
AT&T
182.9b
Bharti Airtel Ltd
1450.2b
Verizon
106.4b
Vodafone Group
890.9b
BCE
28.1b
Inmarsat PLC
276.8b
Chunghwa
Telecom
24.5b
Idea Cellular
224.8b
CenturyLink
12.3b
Current Performance
S&P 500
Telecommunications
1 Day
0.38%
0.22%
1 Month
0.35%
1.71%
3 Month
2.24%
6.50%
YTD
6.56%
4.18%
Business Analysis
Wireless Communications
• Growth
– Strong international
demand for expansion
– Heavy capital expenditure
is required
• Cyclical
– Fluctuates more with
business cycle and the
overall economy
Telecom Services - Domestic
• Mature
– Established networks and
little to no increase in
demand
– Negligible increase in
capital spending
– Workforce eliminations
• Cyclical
– Fluctuates with economy,
but less than wireless
communication
Business Analysis
Supply & Demand
• Ability to develop new markets
– 3G market expanding in developing countries
– 4G LTE market in more developed countries
• Demand varies globally
– Larger demand increases in developing countries and smaller demand
increases in the more developed countries
– Innovations and advances in technology create new demand
• Possible external factors
– Government regulations
Porter’s 5 Forces
Wireless
Communications
Telecom Services –
Domestic
Threat of new entry
Low
Low
Buyer power
Moderate
Moderate
Supplier power
Moderate
Low
Availability of substitutes
High
High
Competition
High
High
Economic Analysis
Positive
•
•
•
Population growth – middle class emerging in developing nations
Consumer confidence
Per capita income & consumer spending
Negative
•
•
Unemployment rate
Energy Prices – increased costs likely passed on to consumer
Economic Analysis
Real GDP
Economic Analysis
Consumer Confidence
Economic Analysis
Consumer Spending
Economic Analysis
Unemployment
Financial Analysis
Trend (22 years)
Financial Analysis
Revenues
Financial Analysis
EBITDA Margin
Financial Analysis
Net Profit Margin
Financial Analysis
ROE
Financial Analysis
EPS Growth
Valuation Analysis
Trailing P/E: 16.3, 0.93
Valuation Analysis
Forward P/E: 15.6, 0.96
Valuation Analysis
P/B: 1.9, 0.7
Valuation Analysis
P/S: 1.4, 1.0
Valuation Analysis
Relative to S&P500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Sector (Current)
1.2
1.2
0.8
0.9
0.5
Sector (Median)
0.93
0.96
0.7
1.0
0.5
Wireless Com. (C)
NA
NA
0.8
1.0
0.5
Wireless Com. (M)
1.4
1.5
0.6
0.8
0.6
Telecom Serv.-Dom. (C)
0.95
1.0
0.8
1.0
0.5
Telecom Serv.-Dom. (M)
0.85
0.88
0.8
1.0
0.5
NIHD (C)
1.2
1.2
0.9
0.9
0.8
NIHD (M)
1.4
1.2
2.7
1.7
1.1
VZ (C)
1.1
1.1
1.2
0.7
0.5
VZ (M)
0.73
0.78
0.9
0.8
0.4
AT&T (C)
0.89
0.93
0.7
1.1
0.6
AT&T (M)
0.82
0.86
0.7
1.4
0.6
Conclusion
• This sector is slightly overvalued according to
the ratios
• NIHD is definitely cheap right now; VZ vs. AT&T
• Foresee growth in wireless telecom, especially
in emerging markets; Little to no growth in
wireline segment
Recommendation
• Increase SIM holding by 31 basis points to bring
it to 4.5%
• Possible reallocation within the SIM
Telecommunication Sector: VZ vs. AT&T
Q&A