FISHER COLLEGE OF BUSINESS
ALLTEL CORPORATION (AT)
Stock Price: $67.44 Target Price: $76.28 Recommendation: BUY
ANALYST:
Sara J. Smith
CONTACT:
smith.4383@osu.edu
(614)507-6114
COURSE:
Finance 724
Pros and Cons to Investment in Alltel
1.)
2.)
FUND MANAGER:
Royce West
DATE:
Nov 29, 2005
BUY
Alltel has been a
consistent performer in
an underperforming
sector. They have good
growth opportunities in
wireless with a great
profit margin. All
valuations point to
BUY.
3.)
4.)
5.)
Recent EPS:
2003: 4.26
2004: 3.40
Positives
Alltel is the shining star of
the Telecom Sector. It has
outperformed both the
Sector and the S&P in the
last five years.
Alltel has a solid financial
history including revenue
and margin growth. Profit
margins are some of the
best in the sector.
Current, Coverage, and
Leverage Ratios are the
best in the Sector.
Conservative Models,
Multiples, and Discounted
Cash Flow all indicate that
the stock is undervalued in
the current marketplace.
Alltel has strategically
aligned their company to
focus on their Wireless line
of business, the only
growing line of business in
the sector.
Unlike other large market
capitalization telecom
companies, Alltel is not
buried in the Capital
Expenditures yet to pay
off.
EPS ESTIMATES
2005: 4.15
2006: 3.59
2007: 4.03
1
1.)
2.)
3.)
4.)
Negatives
The stock is the highest
priced in the sector.
While its valuation is
solid, investors may be
weary of purchasing such
an expensive Telecom
stock.
The spin off of the
Wireline business while
good in a strategy
standpoint, will eliminate
diversity in their revenue
and margin.
Revenue is the largest
growth driver for Alltel
and record revenue
projections may not be
achievable.
Alltel is one of the
smaller market cap
telecom companies. They
may experience
competitive pressures
from the big players,
translating to price
erosion and softer
margins.
COMPANY OVERVIEW1
Alltel Corporation is a customer-focused communications company. Alltel owns
subsidiaries that provide wireless and wireline local, long-distance, network access
and Internet services. Telecommunications products are warehoused and sold by
Alltel’s distribution subsidiary. A subsidiary also publishes telephone directories for
affiliates and other independent telephone companies. In addition, a subsidiary
provides billing, customer care and other data processing and outsourcing services to
telecommunications companies. Alltel is incorporated in the state of Delaware. Alltel
was founded in 1943 as Allied Telephone in Little Rock, Arkansas.
Alltel operates its communications businesses as a single operation capable of
delivering to customers one-stop shopping for a full range of communications products
and services. In addition to its wireless, wireline and long-distance service offerings,
Alltel also provides Internet, high-speed data transport services (''DSL''), paging and
cable television services in select markets.
Alltel is organized based on the products and services that it offers. Under this
organizational structure, Alltel’s communications operations consist of three
segments: 1.) Wireless, 2.) Wireline, and 3.) Communications support services
segments.
The following table is the breakdown of revenues and net income in 2004 per Alltel’s
three segments. As you can see, wireless drives revenue and net income, but is less
profitable than the wireline segment when comparing net income as a percent of
sales.
Figure 1: 2004 Results of Operations
2004 Results of
Operations
Sales
$M
Wireless
5,078.1
Wireline
2,419.8
Support Services 923.8
TOTAL
8,421.7
2
% of Total
Sales
60.3%
28.7%
11%
100%
Net Income
$M
% of Total
Net Income
Net Income
as a% of
Sales
1,020.2
926
62.7
2,008.9
50.8%
46.1%
3.1%
100%
20.1%
38.3%
6.8%
Wireless
Alltel’s wireless segment consists of Alltel’s cellular, PCS and paging operations. As
of December 31, 2004, Alltel provided wireless communications service to more than
8.6 million customers in 24 states. Alltel’s penetration rate (number of customers as
a percentage of the total population in Alltel’s service areas) was 13.8 percent. This
1
2
Alltel 2004 10-K Report
Data from StockVal
2
potential for growth can be seen as a competitive advantage of Alltel, as is has
perhaps become “one of the best wireless carriers in the United States” 3.
In addition, Alltel supplements its wireless service coverage area through roaming
agreements with other wireless service providers that allow Alltel’s customers to
obtain wireless services in those U.S. regions in which Alltel does not maintain a
network presence. Through these roaming agreements, Alltel is able to offer its
customers wireless services covering approximately 95 percent of the U.S. population.
Alltel continues to increase its network capacity and coverage area through new
network construction, strategic acquisitions and affiliations with other wireless
service providers. While these national rate plans provide Alltel the ability to
compete effectively for the high volume, roaming customer, retail roaming revenues
will continue to decline to the extent customers migrate to these national rate plans.
In the current wireless market, Alltel’s ability to compete also depends on its ability
to offer regional and national calling plans to its customers. As previously noted,
Alltel depends on roaming agreements with other wireless carriers to provide roaming
capabilities in areas not covered by Alltel’s network. These agreements are subject to
renewal and termination if certain events occur, including if network quality
standards are not maintained. If Alltel were unable to maintain or renew these
agreements, Alltel’s ability to continue to provide competitive regional and
nationwide wireless service to its customers could be impaired, which, in turn, would
have an adverse effect on its wireless operations.
Wireless revenues are derived primarily from monthly access and airtime charges,
roaming and long-distance charges and charges for custom calling and other enhanced
service features. Wireless revenues comprised 60 percent of Alltel’s total operating
revenues from business segments in 2004, compared to 58 percent in 2003 and
57 percent in 2002. With the acquisition of another rural wireless carrier, Western
Wireless, which was completed in the third quarter of 2005, Alltel is looking at
wireless revenues to comprise 70% of the operating revenue mix.
Touch2Talk, which is a walkie-talkie service, data solutions, prepaid alternatives such
as ''Pay-As-You-Go'' and ''Simple Freedom'' a flat rate per minute and does not require
a deposit or service contract. As of December 31, 2004, prepaid customers
represented approximately 9 percent of Alltel’s wireless customer base.
Wireline
The wireline segment consists of Alltel’s incumbent local exchange carrier (''ILEC''),
competitive local exchange carrier (''CLEC'') and Internet access operations. Alltel’s
wireline subsidiaries provide local telephone service to 3.0 million customers
primarily located in rural areas in 15 states. The wireline subsidiaries also offer
facilities for private line, data transmission and other communications services.
Wireline revenues, which consist of local service, network access and long-distance
3
Yahoo Finance Alltel Dials Up Gains, 10/21/05
3
and miscellaneous revenues, comprised 29 percent of Alltel’s total operating revenues
from business segments in 2004, compared to 30 percent in both 2003 and 2002.
Many of Alltel’s ILEC operations have begun to experience competition in their local
service areas. Sources of competition to Alltel’s local exchange business include, but
are not limited to, resellers of local exchange services, interexchange carriers,
satellite transmission services, wireless communications providers, cable television
companies, and competitive access service providers including those utilizing
Unbundled Network Elements-Platform (''UNE-P''), voice-over-internet-protocol
(''VoIP'') providers and providers using other emerging technologies. Through
December 31, 2004, this competition has not had a material adverse effect on the
results of operations of Alltel’s wireline operations, although competition has
adversely affected Alltel’s access line growth rates.
Alltel expects the number of access lines served by its wireline operations to continue
to be adversely affected by wireless and broadband substitution in 2005.
To address competition, Alltel is focusing its efforts on marketing and selling
additional products and services to its customers by bundling together and offering at
competitive rates its various product offerings, including long-distance, Internet and
DSL services.
It is also noteworthy of adding that Alltel is formalizing plans to spin off their wireline
division. According to the Third quarter earnings conference call, Alltel’s Chief
Executive Scott Ford said “Our strategic review process has gone well with significant
interest expressed by several parties, and we are on pace to finalize our review
before the end of the year”. The wireline business is Alltel’s most profitable, but, if
they are able to sell it at a reasonable price, and strategically align their growing
Wireless capabilities the loss of the business line will be a key strategic change to
foster the growing Wireline business.
Communication
Communications support services consist of Alltel’s long-distance and network
management services, product distribution, directory publishing and
telecommunications information services operations. Revenues and sales from
communications support services comprised 11 percent of Alltel’s total operating
revenues from business segments in 2004, compared to 12 percent in 2003 and
13 percent in 2002.
Long-distance and Network Management Services
Long-distance telecommunications services are provided on both a facilities-based
and resale basis by Alltel subsidiaries. During 2004, approximately 73 percent of
Alltel’s long-distance traffic was transported on its own fiber optic networks. Alltel
provides long-distance service in all of the states in which Alltel provides local
exchange service.
4
Product Distribution
Alltel’s product distribution subsidiary, Alltel Communications Products, Inc.
(''Communications Products''), operates four warehouses and four counter-sales
showrooms across the United States. Communications Products is a distributor of
telecommunications equipment and materials. Communications Products supplies
equipment to affiliated and non-affiliated communications companies, business
systems suppliers, railroads, governments, and retail and industrial companies.
Communications Products offers a large variety of telecommunications-related
products for sale. Certain of these products are inventoried including single and
multi-line telephone sets, wireless handsets, local area networks, switching
equipment modules, interior cable, pole line hardware, and various other
telecommunications supply items. Alltel has not encountered any material shortages
or delays in delivery of products from their suppliers.
Communications Products experiences substantial competition throughout its sales
territories from other distribution companies and from direct sales by manufacturers.
Competition is based primarily on quality, product availability, service, price, and
technical assistance. Since other competitors offer similar products, Communications
Products also offers other services including expert technical assistance, maintaining
wide-ranging inventories in strategically located warehouses and counter-sales
showrooms to facilitate single supplier sourcing and ''just-in-time'' delivery,
maintaining a full range of product lines, and by providing staging, assembly and
other services. Alltel periodically evaluates its product and service offerings to meet
customer expectations and position Communications Products in the market as a
quality, customer-focused distributor.
Directory Publishing
Alltel Publishing Corporation (''Alltel Publishing'') coordinates advertising, sales,
printing, and distribution for 395 telephone directory contracts in 37 states. Alltel
Publishing now provides all directory publishing services, except printing. The services
provided by Alltel Publishing includes directory yellow page advertising sales, contract
management, production, billing, and marketing.
ECONOMIC OVERVIEW4
Alltel was a purely domestic company up until the Western Wireless acquisition in the
third quarter of 2005. Western Wireless has operations in the European (Austria and
Ireland) continent that Alltel plans on selling in upcoming year. So, when analyzing
the economic variables that will affect Alltel’s operations, it is only necessary to
examine the US economy.
4
StockVal
5
Economic Data
Starting at the highest level of economic data, GDP growth, we can see that the US
economy is growing at a rate of 5.4%, which boils out to about a 3.4% when adjusted
for inflation. Meanwhile the federal government budget deficit is just beginning to
improve. Fortunately, Alltel, who is serving only domestic customers, will not be
adversely affected as an emphasis on reducing imports and increasing exports will be
a high priority of policy makers. Alltel will also be more or less immune to imminent
fluctuations in the USD/other currency exchange rates once the Western Wireless
operations are sold. Alltel has entered into a forward contract to hedge the currency
risk of the sale.
Figure 3: Macro-Economic Data
StockVal®
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
HI 12589.6
LO 7522.5
ME 9907.8
CU 12589.6
GR
5.4%
11500
10000
8500
12-31-1995
09-30-2005
7500
GROSS DOMESTIC PRODUCT ($BIL)
HI
LO
ME
CU
4
2
4.70
-1.10
2.40
-1.10
0
12-31-1995
09-30-2005
-2
PERSONAL SAVINGS RATE %
HI
LO
ME
CU
GR
0
-214
212.70
-456.20
-89.20
-285.60
-4.8%
-428
12-31-1995
06-30-2005
-643
FEDERAL GOVT BUDGET DEFICIT ($BIL)
HI
LO
ME
CU
GR
9000
8250
9405.8
6772.9
8503.8
9208.9
3.2%
7500
11-30-1995
09-30-2005
6750
PERSONAL INCOME:REAL,SAAR ($BIL)
Demographics5
I believe demographics are the most relevant data to consider when looking at macro
data related to growth in the Telecom sector. What may be a foreign technology to
the aging US population of 65 years and over which composes 12.4% of the population,
is a commodity to the rest of the population.
The cohort of the population ranging for 15-64 years in age comprises 67% of the
population, while the remaining 20.6% are 0-14 years in age. It is true that most of
the baby boomers have converted to wireless technology due to the ease of use and
exposure to the technology. The technologically savvy generation is just now
5
CIA: The World Factbook (November 2005)
6
reaching an age where they can afford the cutting edge telecom products for their
personal use. Lastly The youngest cohort of the population ranging from 0-14 years in
age will surely be a generation with a cell phone granted to them as soon as the can
say hello. This means stable to growing demand for Telecom in the coming years.
Another notable trend in the business is the targeting of the family unit. We can see
the rollout of the family share plans, a great idea to capture customers young and
old.
In addition, each and every person of varying socio-economic conditions is a potential
wireless customer due to the various product packaging ranging from long-term
contracts or pay as you go. In all, the young demographic momentum is going to
serve as a positive for the telecom sector.
INDUSTRY OVERVIEW
Nature of Telecom Industry
Alltel is part of the Telecommunications Industry which tends to be defensive in
nature. Telecom does not experience fluctuations in revenues and earnings during
particular seasons of the year. Although, it appears that Telecom is not counterdefensive in such a way that it rallies when the market is underperforming. It
appears that when the S&P underperforms, Telecom is right there with it. Refer to
the following graph depicting total returns for the Telecom sector (SP-50), the S&P
500 (SP5A), Verizon Wireless (VZ) and Alltel (AT). In the four year period depicted,
Alltel has outperformed both the sector and the S&P.
7
Figure 4: Five Year Total Return
6
Federal Communications Commission (FCC)
A governing body to be aware of when talking about the Telecom sector is the Federal
Communications Commission (FCC). The FCC is an independent United States
government agency, directly responsible to Congress. The FCC was established by the
Communications Act of 1934 and is charged with regulating interstate and
international communications by radio, television, wire, satellite and cable. The FCC's
jurisdiction covers the 50 states, the District of Columbia, and U.S. possessions. The
FCC will be mentioned at various times throughout this paper.7
Telecom Life Cycle Phase
It is becoming evident that different lines of business included in the Telecom sector
are in different phases of the industry life cycle.
For instance, the wireline and communication /directory publishing lines of businesses
are both in the late mature phases. Companies in the Telecom sector are spinning off
or selling these underperforming lines of business. The reason these lines of business
are underperforming is due to the decreasing demand for these products. According
to the FCC, there are now more wireless carriers than wireline carriers. Consumers
no longer see the need for having a traditional copper wire land-line phone when all
6
7
StockVal
FCC Official Website
8
of their communication needs are bundled in a wireless phone that can go anywhere
with them. These same customers are abandoning there Digital Subscriber Line (DSL)
which utilizes the same copper wire for their data access, for other broadband
alternatives like cable modem (bundled with their cable TV), wireless access, satellite
access, fiber to the home (high speed fiber optic cable providing all communication
and data services), and power line broadband (delivery of data communications over
the existing electric power distribution network). Competition among wireline
providers is fierce another indication that this line of business is no longer at a
growing stage.
On the other hand, the wireless line of business is still experiencing the growth phase
of the industry life cycle on the cusp of entering into a more mature stage. In the
sense that wireless has growth potential, new customers still exist for wireless
technologies. In the sense that wireless is becoming more mature, competition is
tough among wireless providers. This competition is evident from the price erosion of
wireless services. The competitors in the wireless business are now huge companies
capable of consolidating costs and providing lower prices to the consumers. The
trend of mergers and acquisitions in the Telecom industry is likely to continue as
wireless capabilities extend to the rural areas still utilizing land line phones.
On a similar note of M&A, another factor in the Telecom industry is cannibalization.
Mergers and acquisitions in the sector are the direct cause for cannibalization of
business. We can see large companies like Verizon Wireless and SBC with the highest
market capitalizations in the industry just recently participating in exactly this
activity. Verizon purchased MCI and SBC took over AT&T in deals that were finalized
and approved by the FCC in late November. We see large companies merging
together as well purchasing small companies no longer able to compete.
Cannibalization is present because the merging of companies is not an additive game.
There appears to be some overlapping of services, and therefore the acquisition of a
company does not equate to turning over all of their previous revenue. Evidence of
this is Telecoms shrinking sales volume and earnings; meanwhile all the major players
are reporting increases. Refer to the table below, where we can see a steady decline
of revenues and net income in the Telecom sector.
9
Figure 5: Income Statement of Telecom Sector8
Income Statement
S&P TELECOM SERV. SECTOR COMP ADJ (SP-50) M-Wtd
FYE Dec
StockVal ®
2004
% Chg
2003
% Chg
2002
% Chg
2001
% Chg
2000
Revenues ($ Mil)
37858.1
-4
39457.2
-3
Cost of Goods & Services
15811.1
-2
16097.6
2
40818.4
-3
42187.3
-2
43178.3
15857.0
-16
18801.1
Gross Profit
22593.7
-5
23881.7
-6
25431.0
4
24472.5
S G & A Expense
9817.3
-11
11007.1
2
10753.6
8
9994.4
1550.0
-18
1889.2
-10
2089.2
-1
2120.6
5
2014.4
1784.0
-54
3909.9
310
954.6
-69
3114.3
-65
9000.4
439.9
-65
1255.7
22
1029.4
-38
1658.1
-52
3482.3
Net Income Reported ($ Mil)
1844.7
-54
4019.3
2148.5
-60
5335.7
Net Income Adjusted
3076.7
-11
3441.2
3991.6
-31
5825.2
EPS Reported
0.83
-56
1.87
1.19
-52
2.46
EPS Adjusted
1.38
-13
1.59
-34
2.83
2234920
1
0.98
-3
R&D Expense
Interest Expense
Pre-Tax Income
Taxes
Shares Outstanding (Thou)
Dividends Common (Per Shr)
3903.8
-2
-3.24
-13
1.82
-2
1.86
2219071
0
2220575
0
2231286
2
2190218
1.01
13
0.90
1
0.89
-19
1.09
Dividends Preferred ($ Mil)
8
-7260.8
-12
StockVal
10
Figure 6: Income Statement Individual Companies of Telecom Sector9
Income Statement
StockVal ®
VERIZON COMMUNICATIONS CORP (VZ)
FYE Dec
2004
% Chg
2003
% Chg
2002
% Chg
2001
% Chg
2000
Revenues ($ Mil)
71283.0
6
67468.0
1
67056.0
1
66513.0
4
64093.0
Cost of Goods & Services
23168.0
7
21701.0
9
19866.0
Gross Profit
48115.0
5
45767.0
-3
47190.0
S G & A Expense
21088.0
-15
24894.0
14
21778.0
R&D Expense
Interest Expense
2384.0
-15
2797.0
-11
3130.0
-4
3276.0
-6
3490.0
10112.0
116
4673.0
-24
6130.0
124
2731.0
-85
17819.0
Taxes
2851.0
135
1213.0
-21
1539.0
-28
2147.0
-69
7009.0
Net Income Reported ($ Mil)
7831.0
155
3077.0
-25
4079.0
949
389.0
-97
11797.0
Net Income Adjusted
6981.0
-3
7234.0
-14
8379.0
-2
8547.0
1
8457.0
EPS Reported
2.79
151
1.11
-26
1.49
964
0.14
-97
4.31
EPS Adjusted
2.49
-5
2.62
-14
3.03
-3
3.13
1
3.09
SPRINT
NEXTEL (Thou)
CORPORATION (S)
Shares
Outstanding
2831000
2
2789000
0
2789000
2
2730000
0
1.54
0
1.54
0
1.54
0
1.54
0
2004
0.0
% Chg
2003
0.0
% Chg
Revenues ($ Mil)
27428.0
5
26197.0
-2
26679.0
4
25562.0
10
23166.0
Cost of Goods & Services
12656.0
9
11658.0
-3
12076.0
-6
12811.0
10
11620.0
Gross Profit
14772.0
2
14539.0
0
14603.0
15
12751.0
10
11546.0
S G & A Expense
6624.0
0
6608.0
-9
7228.0
-1
7272.0
6
6862.0
-2
1434.0
15
Pre-Tax Income
Income Statement
FYE Dec
Dividends Common (Per Shr)
Dividends Preferred ($ Mil)
2002
0.0
% Chg
2001
0.0 % Chg
StockVal ®
2737000
1.54
2000
0.0
*Meanwhile,
Alltel, Sprint,
Verizon,
Bellsouth,
and SBC
have reported
increases in
revenues.
R&D Expense
Interest Expense
Pre-Tax Income
1248.0
-11
1401.0
-1603.0
-218
-504.0
-591.0
-131
-256.0
-574
-38.0
1290.0
111
610.0
-1447.0
924.0
64
564.0
-118.0
2.16
59
1.36
1.45
7
1.36
27
1.07
-38
1.73
903200
1
893300
1
886800
-1
892400
0.50
0
0.50
0
0.50
0
0
7.0
0
7.0
0
Taxes
Net Income Reported ($ Mil)
Net Income Adjusted
-1012.0
1358.2
47
401.0
95
1244.0
26
989.0
-2350.0
-144
-963.0
-724.0
-213
-231.0
77
-520.0
93.0
EPS Reported
-0.71
EPS Adjusted
0.94
-35
1443400
60
0.50
0
7.0
0
7.0
2004
% Chg
2003
% Chg
2002
% Chg
2001
% Chg
2000
20300.0
0
20341.0
1
20207.0
-5
21211.0
-9
23245.0
7520.0
8
6991.0
5
6670.0
Gross Profit
12780.0
-4
13350.0
-1
13537.0
S G & A Expense
3816.0
1
3777.0
-3
3891.0
Shares Outstanding (Thou)
Dividends Common (Per Shr)
BELLSOUTH CORPORATION (BLS)
Dividends
FYE DecPreferred ($ Mil)
Revenues ($ Mil)
Cost of Goods & Services
Income Statement
-0.16
2.21
0.50
StockVal ®
7.0
R&D Expense
Interest Expense
916.0
-3
947.0
-11
1066.0
-19
1315.0
-1
1328.0
5186.0
-4
5424.0
1
5367.0
41
3814.0
-42
6598.0
Taxes
1792.0
-7
1936.0
2
1892.0
38
1367.0
-43
2378.0
Net Income Reported ($ Mil)
4758.0
22
3904.0
195
1323.0
-46
2447.0
-41
4118.0
Net Income Adjusted
3359.0
-7
3616.0
11
3251.0
-28
4517.0
7
4229.0
EPS Reported
2.59
23
2.11
197
0.71
-45
1.30
-40
2.18
EPS Adjusted
1.83
-6
1.95
13
1.73
-28
2.39
7
2.24
1836000
-1
1852000
-1
1876000
-1
1887000
0
1891000
1.06
15
0.92
16
0.79
4
0.76
0
0.76
Pre-Tax Income
Shares Outstanding (Thou)
Dividends Common (Per Shr)
Another
indication
that the overall Telecom sector is about to enter into a more
Dividends Preferred
($ Mil)
mature stage is the fact that their recent EPS and future EPS estimates are
decelerating. Refer to Figure 7.
9
StockVal
11
Figure 7: Prospective Growth and Margin of the Telecom Sector10
StockVal ®
Prospective Growth & Margin Check
M-Wtd (SP-50)
Price 25.032 11/25/05
Percent Change
Quarter
Revenue
REV
RPS
EARN
Actual
Year
Profit
EPS
Ago
Margin %
EPS
EPS
9,313.0
-3
-3
-33
-33
0.34
0.50
8.4
-1
-3
-39
Mar 04
8,875.4
-3
-5
-17
-19
0.33
0.41
8.9
0
-3
-20
Jun 04
9,087.4
-2
-2
-11
-12
0.36
0.41
9.3
0
-2
-13
Sep 04
9,206.3
-2
-2
-1
-1
0.37
0.38
9.4
0
-2
-1
+2
04
9,169.3
-2
-2
3
2
0.35
0.34
8.8
-1
-2
Mar 05
9,108.9
3
4
5
7
0.36
0.33
9.1
+1
+3
+6
Jun 05
9,255.9
2
2
12
12
0.41
0.36
10.3
+2
+2
+12
Sep 05
9,519.9
3
0
18
13
0.42
0.37
10.7
+1
+3
+13
T4Q
37,053.9
2
1
10
9
1.53
Dec 05 E
17
13
0.39
0.35
+12
Mar 06 E
23
18
0.42
0.36
+16
9.7
Jun 06 E
12
8
0.44
0.41
+8
Sep 06 E
9
9
0.46
0.42
+9
F4Q E
15
12
1.71
Point-to-Point Growth Rates (%)
Years
REV
RPS
2
1
EARN
1
Long-Term Growth Rate Estimates (%)
-1
Median Estimate
EPS
10
9
11
-4
-4
Figure 8: Telecom Sector Performance
-1
3
6.4%
Number of Estimates
10
Standard Deviation
4
-2
-2
-7
-7
5
S&P TELECOM
SERVICES
SECTOR
(S50)Default GRE Estimate
3.9%
470
2
2
10
PRICE 116.1
DATE 10-28-2005
3.9%
405
StockVal15®
-1
0
EPS Lagged 1-Year
20
300
3
2
3
2
3
3
3
2
Analyst GRE Estimate
350
Expected Report Date
300
260
260
225
225
195
195
170
170
145
145
125
125
110
110
95
95
80
80
70
60
1995
The Ohio State University
Fisher College of Business
1996
1997
1998
Price Change
%
Diff SP5
1-Day
1.83
0.18
1-Week
3.49
1.90
4-Weeks
-2.19
0.28
QTD
-2.19
0.28
YTD
-10.05
-8.94
2004
15.97
6.98
2003
3.28
-23.10
2002
-35.89
-12.52
FYE Dec 2004 EPS 3.49
1999
2000
First Call Data
Mean Estimate
Change
High
Low
Total
# Up
# Down
House Estimate
PE Ratio
2001
2002
2005
NE
NE
SECTOR VALUATION
11
REV
Dec 03
Dec
10
Momentum %
SF
StockVal
StockVal
12
2003
2006
NE
NE
2004
2007
NE
NE
2005
2006
70
60
2007
Data Page # 1
Revenues ($Mil)
Market Value ($Mil)
Shares Out (Mil)
Daily Volume (Thou)
Daily Volume ($Mil)
Dividend Estimate
Payout Ratio
Retention Rate
Dividend Yield
80
116
0
0.0
4.29
3.70%
Absolute Valuation
Figure 9: Absolute Valuation and Multiples of Telecom Sector12
S&P TELECOM SERV. SECTOR COMP ADJ (SP-50) Price 23.6
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
StockVal®
2005
2006
HI
LO
ME
CU
25
20
29.4
11.8
17.4
13.7
15
10-27-1995
10-28-2005
10
PRICE / YEAR-FORWARD EARNINGS
HI
LO
ME
CU
8
6
9.0
3.1
5.8
4.2
4
10-27-1995
10-28-2005
2
PRICE / EBITDA
HI
LO
ME
CU
3
3.58
1.14
1.99
1.36
2
10-27-1995
10-28-2005
1
PRICE / SALES
HI
LO
ME
CU
12
9
12.4
3.9
7.5
5.0
6
10-27-1995
10-28-2005
3
PRICE / CASH FLOW ADJUSTED
According to the graphs above, the Telecom sector is trading below the mean in all
categories, an indication that the sector is undervalued. Investor confidence in the
performance of Telecom companies is lacking due to the less than great earnings of
most of the Telecom companies.
The Telecom Industry is flattening out in terms of pricing over the past three years,
yet another indication that while the Telecom is still experiencing growth, it is
entering into the mature stage. Penetration of the market is fairly high. It is no
longer a matter of who can get to the customers first, but, instead who can offer the
most comprehensive products at the lowest price. From performance standpoint,
those providers who are able to offer customers low prices with the highest level of
cost efficiencies are able to provide shareholders with positive returns, and thus drive
up the price of their stock. It just so happens that Alltel is a diamond in the rough
among the Telecommunications providers- doing just that. Most other companies
have invested huge amounts into capital projects that have yet to pay off, and in the
meantime are drowning in the cost.
12
StockVal
13
Relative Valuation to the S&P 500
Figure 10: Telecom Sector Valuation Relative to the S&P 50013
S&P TELECOM SERV. SECTOR COMP ADJ (SP-50) Price 23.9 StockVal®
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
1.4
HI
LO
ME
CU
1.2
1.0
1.22
0.69
0.91
0.92
0.8
11-10-1995
11-11-2005
0.6
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
1.4
HI
LO
ME
CU
1.0
0.8
1.40
0.41
0.76
0.55
0.6
11-10-1995
11-11-2005
0.4
PRICE / EBITDA RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
2.0
HI
LO
ME
CU
1.6
1.88
0.81
1.19
1.00
1.2
11-10-1995
11-11-2005
0.8
PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
2.0
HI
LO
ME
CU
1.6
1.2
1.85
0.42
0.82
0.66
0.8
11-10-1995
11-11-2005
0.4
PRICE / BOOK VALUE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
The graph above examines the relative value of the Price/EPS estimates,
Price/EBITDA, Price/Sales, and Price/Book value of Telecom sector when compared to
the S&P 500 over the past ten years.
At a quick glance, we can see that the Telecom industry is selling significantly below
the mean in Price/EBITDA, Price/Sales, and Price/Book value. Meanwhile, the
Price/EPS estimate is right in line with the mean. This suggests that the Telecom
sector is relatively undervalued at the moment. This is more than likely due to
Telecom companies failing to meet Wall Streets expectations over the past few
quarters. It appears that it is a strategically inexpensive time to purchase Telecom
stocks. Using the current multiples and projected target multiples, the target price
of Telecom stock is $26.31, with a projected total return of 15.16%. Refer to Figure
11.
13
StockVal
14
Figure 11: Telecom Sector Target Price Calculation
Absolute
Valuation
Current
Multiple
Target
Multiple
Data
Target
Price
P/Forward E
13.7
14
1.72
24.08
P/EBITDA
4.2
5.5
5.62
30.91
P/Sales
1.36
1.4
17.35
24.29
P/CF
5
5.5
4.72
25.96
Mean
26.31
Current Sector Price- 23.60
Target Sector Price- (26.31/23.6)-1=11.4+3.76= 15.16% Total Return
POSITIVES
Growth potential
Growth potential is one if the most important things to consider when investing in
Alltel. Alltel’s penetration rate in the markets it served was only 13.8% in 2004
compared to 13.3% in 2003 and 12.9% in 200214. This leaves a huge margin for growth.
Also, it is important to consider that Alltel is taking part in talks about selling its
wireline division. As mentioned earlier, while the wireline division provides the
highest margin, it is a dying line of business as consumers lean toward a wireless
communication package. I see this as strategically smart move for Alltel. They have
collected the high margins for the past couple of years, and have used those proceeds
to buy Western Wireless, aligning them as one of the strongest wireless providers.
It is also worthy of mentioning that Alltel has invested a great deal into a marketing
campaign focusing on catering to the customer. “The new campaign includes
television, print, radio and outdoor advertising that will convey Alltel's commitment
to treat customers fairly and with respect”.
The campaign is threefold including three brand promises, which are all wireless
industry firsts. Essentially, no other wireless provider has offered their customers
these services.15
14
Alltel Corporation 10-K Report
15
1.) Automatic Minute Back - An automatic one-minute credit for any call dropped on
the Alltel network. This promise is a both a statement of confidence in the superior
quality of Alltel's network and a commitment to accountability.
2.) Anytime Plan Changes - The freedom to change rate plans at any time without
changing contracts. This promise means Alltel customers will be able to take
advantage of the best rate plan for their changing needs without penalty.
3.) Unlimited Calls Home - The ability to call home free from a wireless phone on
select plans. This promise emphasizes Alltel's commitment to families.
This campaign is targeting wireless customers. Alltel is strategically aligned to be at
the forefront of wireless services, and appears to have allocated their resources
appropriately.
Competitive Pressure-Pricing
With the consideration that Alltel is going to be a primarily a wireless provider in the
very near future, they will be able to offer rate plans and contracts at a lower price
than it’s competitors with a more complex mix of services. I assume that Alltel it
expecting a mix of higher volume and lower prices to drive growth in their revenues.
Acquisitions
The Telecom sector is one of continuous mergers and acquisitions, and Alltel is no
exception. It has been Alltel’s strategy to essentially buy more customers and
translate those new customers into revenue growth and margin. The following is a
brief overview of the purchases Alltel has made in the last five years:
Figure 12: Alltel Acquisitions since 200016
2000
Alltel acquires wireless properties in New Orleans and Baton Rouge
from SBC Communications Inc.
2002
Alltel acquires Verizon local access lines in Kentucky for $1.9 billion.
2003
2004
Alltel acquires 700,000 wireless customers from CenturyTel, Inc. in
Arkansas, Louisiana, Michigan, Mississippi, Texas and Wisconsin for
$1.5 billion.
Alltel purchases wireless properties in southern Mississippi from
Cellular XL.
Alltel acquires wireless assets from U.S. Cellular and TDS Telecom.
2005
Alltel announces acquisition of Western Wireless
Alltel acquires wireless assets from Cingular
Alltel acquires wireless properties from PSC
As previously stated Alltel recently purchased the rural carrier Western Wireless for
$4.5 b and sealed the deal in the third quarter 2005. Alltel has capitalized on these
16
Alltel Official Website
16
new wireless customers, and reported a 20% increase in revenues over last years third
quarter.
In a November 18th, 2005 news release, it was announced that Alltel reached a
definitive agreement to purchase Midwest Wireless for $1.075 billion in cash.
“Midwest Wireless is a leading regional wireless services provider with more than
400,000 customers in Minnesota, Iowa and Wisconsin.”17 It appears that this purchase
will strengthen Alltel’s presence in the region and provide growth in revenues with
the substantial addition of new customers.
The acquisition Alltel has made in the last several years enables them to report
growth in revenue and margin. It is apparent that acquiring customers by means of
purchasing them is there strategic focus as a way to grow their customer base. The
specifically target rural areas where the larger carriers are not as prevalent.
Technologies
Another repetitive buzzword in the telecom sector is technology. I do not intend to
explain the capabilities of all the new technologies in the market. However, it is
worth acknowledging that these products exist and that a demand exists. It is
apparent to see that demand exists because of the visible trend that Americans want
the latest and greatest when it comes to cell phone, data access, and accessories.
We seem to have an insatiable appetite for information and electronics.
For instance, new products being carried in Alltel stores in the last few months
include: BlackBerry 7250ê handheld device with Handango InHand software
applications, UTStarcom Pocket PC 6700, its first Windows Mobile device, DISH
Network TV, Samsung handsets with VibeTonzª touch sensation, picture and video
sharing through wireless phones, and the list goes on.18
Management
I think it is worth acknowledging Alltel’s management when relaying the company’s
success. Alltel has been a consistent performer in a consistently underperforming
sector; it’s not just luck, and it is not just me who noticed. For instance, Forbes
named Alltel the "Best Managed Company in Telecom" in January 2005. 19
As Alltel continues down the path of acquiring other carriers in an effort to grow
revenue and become the leading wireless carrier, it is safe assume that they are
executing due diligence in their purchases and aligning the additions to create
shareholder wealth.
17
Alltel Official Website
Alltel Official Website
19
Yahoo Finance
18
17
NEGATIVES
Verizon and SBC
It is true that while Alltel is aligned to be at the forefront of wireless providers, they
face competition from companies with a larger coverage areas and market
capitalization.
Figure 13: Top Five Leaders and Market Capitalization in the Telecom Sector20
COMPANY
MARKET CAPITALIZATION
VERIZON COMMUN [VZ]
$88.4 B
AT&T INC. [SBC]
$81.3 B
BELLSOUTH CP [BLS]
$50.5 B
ALLTEL CP [AT]
$25.8 B
B C E INC [BCE]
$23.1 B
As you can tell from the chart above, Verizon and SBC dwarf Alltel in market
capitalization. Alltel does not have the ability to move the market in the same way
Verizon and AT&T. They have to offer a competitive rate based off the rates of their
larger competitors.
Also, it is apparent that Verizon has a much larger coverage area than Alltel. Refer to
coverage maps below:
Figure 14: Alltel Wireless Coverage Map21
*Alltel
coverage
area
20
21
Yahoo Finance
Alltel Official Website
18
Figure 14: Verizon Wireless Coverage Map22
* Verizon
coverage
area
Alltel has little to no coverage in 12 states (Alltel serves more than 15 million
subscribers in 36 states). That is an obvious disadvantage when customers are looking
for flexibility in their coverage area, and trying to avoid roaming charges. Companies
like Verizon and SBC are able to offer their customers this all-inclusive advantage. I
expect that Alltel will continue to acquire small, rural companies much like Western
Wireless, as well as purchasing licenses and customers from the big players to fill this
gap.
Spin-off of Wireline
Alltel is reportedly near a deal to sell its wireline (local-line telephone) assets for as
much as $10 billion in stock. A group comprising Citizens Communications,
CenturyTel, and Valor Communications is in late-stage talks for the assets, the
Financial Times said. In an effort to focus on providing wireless services, the risk
involved in selling its wireline business is that Alltel would lose the high margins of
the wireline business. The proceeds of the sale would temporarily ward off any
financial problems. However, Alltel will need to be even more aggressive in acquiring
wireless companies with the capital they receive from the sale, and growing its
customer base.
22
Verizon Official Website
19
FINANCIALS23
Income Statement Analysis
Figure 15: Alltel’s Income Statement
Income Statement
StockVal ®
ALLTEL CORPORATION (AT)
FYE Dec
2004
% Chg
2003
% Chg
2002
% Chg
2001
% Chg
2000
Revenues ($ Mil)
8246.1
3
7979.9
12
7112.4
8
6615.8
5
6308.9
Cost of Goods & Services
3449.7
4
3317.1
13
2930.3
8
2707.7
Gross Profit
4796.4
3
4662.8
11
4182.1
7
3908.1
S G & A Expense
1524.2
2
1498.1
16
1297.0
8
1201.1
-12
1369.1
R&D Expense
Interest Expense
369.2
-6
393.8
6
371.0
32
281.6
-1
284.3
1592.0
4
1534.1
13
1360.3
-17
1631.0
-49
3208.0
565.3
-3
580.6
14
510.2
-22
653.0
-51
1325.3
Net Income Reported ($ Mil)
1046.2
-21
1330.1
44
924.3
-13
1067.0
-45
1928.8
Net Income Adjusted
1038.1
9
954.4
5
906.9
-1
913.3
31
699.1
EPS Reported
3.39
-20
4.25
44
2.96
-13
3.40
-44
6.08
EPS Adjusted
3.37
10
3.05
5
2.90
0
2.91
32
2.20
308400
-1
312800
0
312300
0
313500
-1
317200
1.49
5
1.42
4
1.37
3
1.33
3
1.29
0.1
0
0.1
0
0.1
0
0.1
0
0.1
Pre-Tax Income
Taxes
Shares Outstanding (Thou)
Dividends Common (Per Shr)
Dividends Preferred ($ Mil)
Alltel’s income statement, shown above, is a positive attribute of the company. Over
the past five years, Alltel has managed to report increases Revenue, Net Income
adjusted, and subsequently EPS. Refer to Figure 16 for the Trends in Revenue, and
Net Profit Margin. As you can see, they have delivered steady increases in revenue
with each year being a record one, along with on of the highest profit margins in the
sector. Note, this data does not include Alltel’s third quarter earnings release, which
reported an 18% increase in Net Income.
23
All Financial Data pulled from StockVal
20
Figure 16: Alltel’s Revenue and Net Profit Margin Trend
ALLTEL CORPORATION (AT) Price 67.4
ALLTEL
(AT) Price
67.4
1996 CORPORATION
1997
1998
1999
2000
2001
1996
7500
1.0
6300
0.8
5200
0.6
4300
0.4
1997
1998
1999
2000
2001
StockVal®
2002
2002
2003
2003
2004
2004
2005 StockVal
2006
2005
2006
HI
LO
HI
ME
LO
CU
ME
GR
CU
9045
4302
1.17
6194
0.58
9045
0.79
7.9%
0.92
12-31-1995
09-30-2005
12-31-1995
09-30-2005
REVENUES
RETURN ON EQUITY RELATIVE TO S&P TELECOM SERV. SECTOR COMP ADJ (SP-50) M-Wtd
HI
HI
LO
LO
ME
ME
CU
CU
18
1.2
15
0.9
12
0.6
®
RETURN ON EQUITY %
NET PROFIT MARGIN ADJUSTED RELATIVE TO S&P TELECOM SERV. SECTOR COMP ADJ (SP-50) M-Wtd
21.0
1.41
12.9
0.66
16.3
1.10
12.9
1.30
12-31-1995
12-31-1995
09-30-2005
09-30-2005
220.0
The main
drivers in Alltel’s earnings growth appear to be a combination ofHI
sales
230
HI
3.20
LO
-4.6
3
LO
0.38
CU 172.2
growth
appear
170 and a very modest repurchase of shares of stock. Operating expenses
ME
1.05
GR 10.5%
2
0.90
to increase
at a slightly lower rate than that of the sales growth. In orderCUto report
120
1
11-24-1995
disproportionately
higher increases in EPS (than net income), Alltel maintains
the
11-24-1995
11-25-2005
90
11-25-2005
0
same or slightly
few shares outstanding.
TOTAL RETURN %
GROWTH RATE ESTIMATE RELATIVE TO S&P TELECOM SERV. SECTOR COMP ADJ (SP-50) M-Wtd
HI
16.30
HI
2.35
4.70
While16
2005 is not shown in the chart above, it is no exception to the rule LO
of growth
in
1.8
LO 10.50
0.90
ME
ME
1.22
12
CU
5.70
revenues,
net income, and EPS. For the third quarter of 2005, Alltel reported
a
19%
1.4
CU
2.33
8
increase
in
Revenue
over
last
year.
A
good
deal
of
this
increase
can
be
attributed
to
1.0
11-24-1995
11-24-1995
11-25-2005
4
the Western
Wireless
acquisition.
11-25-2005
0.8
GROWTH RATE ESTIMATE
PRICE RELATIVE TO S&P TELECOM SERV. SECTOR COMP ADJ (SP-50) M-Wtd
Balance Sheet Analysis
Figure 17: Alltel’s Balance Sheet Ratios
Balance Sheet Ratios
StockVal ®
ALLTEL CORPORATION (AT)
FYE Dec
2004
2003
2002
2001
2000
1999
1998
1997
Cash Items/Total Capital (%)
3.89
5.22
1.11
0.90
0.69
0.22
1.22
0.28
Quick Ratio
0.96
1.04
0.64
1.03
0.88
0.79
0.72
0.74
Current Ratio
1.11
1.16
1.04
1.38
1.17
0.98
0.85
0.94
Net Working Capital ($000)
157
236
78
483
265
-27
-199
-63
Long-Term Debt/Equity (%)
75.08
79.48
102.46
69.38
90.51
89.20
101.17
126.09
Long-Term Debt / Capital (%)
42.88
44.28
50.61
40.96
47.51
47.15
50.29
55.77
Total Debt/Common Equity (%)
78.24
83.43
110.71
70.31
91.86
91.14
103.38
128.04
Total Debt/Capital (%)
44.69
46.48
54.68
41.51
48.21
48.16
51.26
56.46
Total Debt/Total Assets (%)
33.59
35.16
40.88
31.30
38.72
35.57
36.97
42.33
Days Inventory
16.59
13.44
17.25
22.08
Days Receivable
40.40
40.71
52.26
68.48
73.68
59.73
62.40
52.06
Days Payable
47.42
52.80
51.53
70.38
Asset Turnover
0.50
0.49
0.49
0.54
0.55
0.54
0.51
0.56
Plant & Equipment Turnover
1.09
1.05
0.99
0.99
1.03
1.02
1.01
1.18
21
Alltel’s Balance sheet ratios have a few key highlights. First, they appear to have cut
their days receivable in a substantial way. The industry average is at 46.69 days. In
the meantime, Alltel has maintained a stretched out payable schedule.
Other positive highlights of these ratios are Alltel’s high Quick and Current Ratios.
When compared to the industry, of .56 and .76 respectively, Alltel seems to have a
much healthier capital structure and liquidity.
Cash Flow Analysis
Figure 18: Alltel’s Cash Flow Analysis
Cash Flow Analysis
StockVal ®
ALLTEL CORPORATION (AT)
FYE Dec
Net Income Reported ($ Mil)
Accounting Adjustment
Net Income Adjusted
Depreciation & Amort
Cash Flow Adjusted
2004
% Chg
2003
% Chg
2002
% Chg
2001
% Chg
1046.2
-21
-8.1
98
1038.1
9
954.4
1299.7
4
1247.7
2337.8
6
2202.1
2000
1330.1
44
924.3
-13
1067.0
-45
1928.8
-375.7
-2056
-17.4
89
-153.7
88
-1229.7
5
906.9
-1
913.3
31
699.1
14
1095.5
1
1082.0
9
988.4
10
2002.4
0
1995.3
18
1687.5
Capital Expenditures
1157.7
-3
1194.4
-2
1213.2
-3
1250.6
7
1164.7
Free Cash Flow Adjusted
1180.1
17
1007.7
28
789.2
6
744.7
42
522.8
Dividends Common ($ Mil)
459.5
3
444.2
4
427.9
3
417.0
2
409.2
Free Cash Flow After Dividends
720.6
28
563.5
56
361.3
10
327.7
188
113.6
Net Cash From Operations
2466.8
0
2474.7
3
2392.2
27
1882.1
26
1496.3
Net Cash From Investing
-1258.4
1
-1265.9
72
-4494.6
-953
-427.0
66
-1264.3
Net Cash From Financing
-1381.2
-13
-1218.2
-183.4
Other Cash Flows
Change In Cash & Equiv
-1479.5
-707
-0.1
532.6
465
2079.5
94.3
91
49.3
4830
1.0
-172.9
523.2
633
71.4
187
24.9
-50
49.6
There are several positive items to examine in Alltel’s Cash Flow. First, Alltel has
generated an increasing free cash flow over the past five years. Second, Alltel’s Net
Cash from Operations, a measure of sustainable growth had steadily increased for four
years with a little stagnation in 2004. This can be explained by a somewhat flat
increase in net income due to restructuring charges, and a large gain on the
discontinued operations in 2003.
Alltel’s Net Cash from Investing and Financing are both consistent outflows, and this
enables Alltel to maintain its’ competitive position in the sector and maintain its
increases in revenues, and continue to pay its solid 2.28% dividend.
For instance, in Net Cash from Investing, Alltel consistently has an outflow in the
acquisition of property, plant, and equipment. This outflow comprises the bulk of the
outflow.
Alltel’s consistently negative flow of Net Cash from Financing is attributable their
consistent payment of a dividend to their shareholders, reduction in long-term debt,
and the repurchase of stock.
22
I am expected Alltel to report an overall 31% increase in Net Income in 2005 which
will translate into a substantial increase in Net Cash from Operations.
ROE Analysis
Figure19: Alltel’s ROE Ratios
DuPont Analytics
StockVal ®
ALLTEL CORPORATION (AT)
Price 63.430 11/11/05 FYE Dec
INT
MARGIN%
TAX
BURDEN
EBIT
EBT
-------
-------
Sales
ASSET
BURDEN%
EBIT
TURN
LEVERAGE
Assets
T
Sales
1 - ----
-------
-------
EBT
Assets
Equity
ROE
Acct
ROE
Rpt%
Adj%
Adj%
2004
23.78
0.81
64.49
0.50
2.35
14.79
-0.11
14.67
2003
24.16
0.80
62.15
0.49
2.53
20.43
-5.77
14.66
2002
24.34
0.79
62.49
0.49
2.49
15.99
-0.30
15.69
2001
28.91
0.85
59.96
0.54
2.31
20.02
-2.88
17.13
2000
55.36
0.92
58.69
0.55
2.46
41.48
-26.44
15.03
1999
25.34
0.83
58.94
0.54
2.67
20.00
-0.20
19.79
1994
19.42
0.66
59.95
0.58
1998 on Equity
24.66
0.80 a similar
54.34
0.38Statements:
18.42
Alltel’s Return
tells
story0.51to that2.90of its 18.05
Financial
1997
26.54
0.81
60.06
0.56
3.05
22.05
-3.71
success in an1996increasingly
competitive
sector.
ROE has
held
steady2.86around18.34
14.7% for
19.10
0.73
60.80
0.58
3.24
16.00
18.86
the past two1995years, 21.22
the industry
is 59.33
at 14% an0.59all time
0.69
3.60 low. 18.27
-0.98
17.30
17.30
While the levers
have
the0.52company appears to be operating with
1993
21.42changes
0.68 modestly,
53.80
1992
19.50
0.61
59.90
competent and
attentive
management.
While the margin lever has decreased in the
1991
19.71
0.53
62.58
increasingly1990
competitive
sector,
Alltel
has smoothed out its cash flows in a way that
19.70
0.53
65.06
taxes are less burdensome.
Consensus Estimates
Figure 20: Alltel’s Consensus Estimates
First Call Consensus Summary
StockVal ®
ALLTEL CORPORATION (AT)
Price 63.430 11/11/05 FYE Dec
Quarterly Mean Estimates
Five-Year Growth Rate Forecast
Growth Rate Est Median
Q1
Q2
Q3
Q4
EPS
Dec
Mar
Jun
Sep
Number of Estimates
Mean
0.82
0.85
0.89
0.93
Standard Deviation
High
0.91
0.90
0.93
0.97
Low
0.75
0.79
0.86
0.89
23
6
6
6
Number of Est
5.70
12
3.10
Mean Estimate History
Revenues
FY1
FY2
FY3
DEC 05
DEC 06
DEC 07
Mean
2589.33
2522.35
2608.29
2650.04
Current
3.46
3.62
3.81
High
2656.00
2568.00
2658.00
2698.00
Last Week
3.46
3.62
3.81
Low
2546.00
2473.51
2584.72
2630.00
4 Weeks Ago
3.42
3.63
3.78
1.19
1.53
1.29
1.22
8 Weeks Ago
3.42
3.65
3.87
13
4
4
4
12 Weeks Ago
3.41
3.66
3.91
FY1
FY2
FY3
FY1
FY2
FY3
DEC 05
DEC 06
DEC 07
DEC 05
DEC 06
DEC 07
Mean
3.46
3.62
3.81
Last Week
0.00
0.00
0.00
High
3.56
3.80
4.16
4 Weeks Ago
1.17
-0.28
0.79
Low
3.37
3.44
3.45
8 Weeks Ago
1.17
-0.82
-1.55
Number of Est
24
24
10
12 Weeks Ago
1.47
-1.09
-2.56
Number Up
18
12
2
3
10
5
Mean
9501.01
10558.54
High
9810.00
11380.00
Low
9413.14
10255.50
0.88
3.24
19
19
Stand Dev %
Number of Est
Annual Mean Estimates
EPS
Number Down
Mean Estimate % Change From
Next Expected Report Date
Revenues
Stand Dev %
Number of Est
23
01/23/06
Alltel’s Consensus estimates changed in a substantial manner after their third quarter
earnings announcement on October 21st. They managed to beat EPS expectations by
twelve cents, and post a previously mentioned 20% increase in revenues over last
year.
Upward revisions were made to forecasted 05’ and 06’ revenues and EPS after the
earnings announcement. The revenue estimates above imply a 15% growth in 2005
and 12.5% growth in 2006. I am more or less in line with mean consensus revenue
estimates. However, in the model I created I have a slight downside in EPS for 2005
and 2006, and a substantial upside for 2007 (more will be said about the model
valuation at the end of the paper). As you can see by the consensus chart above,
there exists quite the parity between the mean and high estimates.
In regards to the median consensus growth rate estimate (GRE) of 5.7%, I feel more
optimistic. I think that achievable five year growth rate estimate is 6.5%. As you can
see there is a 3.1% standard deviation in the consensus GRE indicates that once again,
analysts have very differing opinions on Alltel. With the increasing market
penetration, Alltel is capable of growing their business at a higher rate than 5.7%.
STOCK VALUATION24
Absolute Valuation
Figure 21: Absolute Valuation and Multiples of Alltel
StockVal®
ALLTEL CORPORATION (AT) Price 67.4
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
HI
LO
ME
CU
32
24
37.3
12.1
18.7
18.7
16
11-24-1995
11-25-2005
8
PRICE / YEAR-FORWARD EARNINGS
HI
LO
ME
CU
12
9
12.7
3.4
5.9
6.6
6
11-24-1995
11-25-2005
3
PRICE / EBITDA
HI
LO
ME
CU
4
5.11
1.73
2.28
2.39
2
11-24-1995
11-25-2005
0
PRICE / SALES
HI
LO
ME
CU
6
4
7.0
1.7
3.3
1.9
2
11-24-1995
11-25-2005
0
PRICE / BOOK VALUE
24
All graphs pulled from StockVal
24
Based off of the Figure 21 above, it is apparent that Alltel is trading at above the
mean in all but one category, Price/Book. While a simple assumption would be that
Alltel’s stock is overvalued, I think there is more to the case. For instance, just two
weeks ago these ratios were below their 10 year mean when the stock was trading at
$63.40. Refer to Figure 22.
Figure 22: Absolute Valuation and Multiples of Alltel, 11/14/05
StockVal®
ALLTEL CORPORATION (AT) Price 63.4
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
HI
LO
ME
CU
32
24
37.3
12.1
18.8
17.8
16
11-10-1995
11-11-2005
8
PRICE / YEAR-FORWARD EARNINGS
HI
LO
ME
CU
12
9
12.7
3.4
5.9
6.2
6
11-10-1995
11-11-2005
3
PRICE / EBITDA
HI
LO
ME
CU
4
5.11
1.73
2.28
2.25
2
11-10-1995
11-11-2005
0
PRICE / SALES
HI
LO
ME
CU
6
4
7.0
1.7
3.3
1.8
2
11-10-1995
11-11-2005
0
PRICE / BOOK VALUE
I feel as though these multiples will continue to expand in the following years as Alltel
experiences record revenues, increasing efficiency, and profit margins. It appears
that other analysts feel the same way. One year forward Price/EPS a t18.57 and
Price/Sales at 2.86.25
25
Yahoo Finance, 11/28/05
25
Relative the Telecom Sector
Figure 23: Alltel Relative to the Telecom Sector
StockVal®
ALLTEL CORPORATION (AT) Price 67.4
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
HI
LO
ME
CU
1.5
1.2
1.54
0.77
1.03
1.19
0.9
0.6
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P TELECOM SERV. SECTOR COMP ADJ (SP-50) M-Wtd
11-24-1995
11-25-2005
HI
LO
ME
CU
1.2
1.0
1.54
0.62
1.12
1.47
0.8
11-24-1995
11-25-2005
0.6
PRICE / EBITDA RELATIVE TO S&P TELECOM SERV. SECTOR COMP ADJ (SP-50) M-Wtd
HI
LO
ME
CU
1.5
1.69
0.95
1.23
1.50
1.2
11-24-1995
11-25-2005
0.9
PRICE / SALES RELATIVE TO S&P TELECOM SERV. SECTOR COMP ADJ (SP-50) M-Wtd
HI
LO
ME
CU
1.8
1.5
1.82
1.07
1.36
1.55
1.2
11-24-1995
11-25-2005
0.9
PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P TELECOM SERV. SECTOR COMP ADJ (SP-50) M-Wtd
Relative the S&P 500
Figure 24: Alltel Relative to the S&P 500
StockVal®
ALLTEL CORPORATION (AT) Price 67.4
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
HI
LO
ME
CU
1.5
1.2
1.50
0.64
0.94
1.22
0.9
11-24-1995
11-25-2005
0.6
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
1.0
0.8
1.30
0.41
0.76
0.86
0.6
11-24-1995
11-25-2005
0.4
PRICE / EBITDA RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
1.8
1.5
2.09
1.08
1.47
1.64
1.2
11-24-1995
11-25-2005
0.9
PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
1.2
0.9
1.22
0.55
0.74
0.76
0.6
11-24-1995
11-25-2005
0.3
PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
Once again, these relative ratio multiples shown in Figures 23 and 24 make it appear
that Alltel is overpriced when compared to its mean reversion. However, I feel that
26
these margins will continue to expand as the market rewards Alltel for there
sustained revenue, and margin growth, thus driving up the price of the stock.
Figure 25 uses the current multiples and projected target multiples to calculate a
target price of Alltel’s stock. The projected return totals in a 15.09% using this
valuation technique. The target multiples I used are conservative, and are in line
with consensus estimates.
Figure 25: Alltel Target Price Calculation
Absolute
Valuation
Current
Target
Multiple
Estimates
Target
Price
18.7
19
3.59
68.21
Price/Sales
2.39
2.5
28.21
70.53
Price/Book
1.9
2.3
35.49
82.54
Price /EBITDA
6.6
8
10.22
81.60
Price /Cash Flow
8.7
10
7.75
Price /Forward E
MEAN
77.5
76.08
Current Price- 67.44
Target Price- (76.08/67.44)+ 2.28 DIV YIELD = 15.09% Projected Return
Model Valuation
Appendix A and B are the Model of Forecasted Financial data and Alltel’s Discounted
Cash Flow respectively. The results of the Discounted Cash Flow, whose inputs
include the forecasted results of the model are yet another valuation technique that
recommends purchasing Alltel’s stock. The general theme of the model is that the
estimates are conservative, and still promote a buy of Alltel.
To first explain my financial model, I will first point out the substantial revenue
growth I have mentioned several times throughout this document. As you can see,
Sales Revenue Growth is forecasted to be near 15% for 2005 year end. I have
projected another 12% increase in revenue for both 2006 and 2007. I am assuming
that Alltel will continue to capitalize on Western Wireless capabilities, continue
attracting new customers in their current coverage area with their customer focused
marketing campaign, as well as benefit from the 400,000 new customers from the
Midwest Wireless transaction. Revenue per customer is about $577.5626 per year, so
26
Alltel Corporation 10-K Report
27
those new customers translate into $231 million dollars in revenue per year
(represents 3% growth over 2004). Also, my 2005 and 2006 forecasted revenues are
directly in line with the conservative estimates on StockVal.
I forecasted operating expenses to match historical rates, a conservative estimate,
but, I believe Alltel will manage to continue to increase efficiency as the have proven
to do in so in recent quarters. Another notable piece of information in Alltel’s
Financial Statements, is that they have reported significant amounts in Other Net
Income, and Gain of the disposal of assets. This data is hard to forecast, so I
estimated a low number. I also forecasted that interest expense would increase
slightly. This is the reason Net Income from continuing operations in 2006 does not
increase at the same rate that revenue increases. This is due to the 400 million dollar
gain in those two categories.
The EPS estimates I have calculated are almost directly inline with conservative
consensus estimates.
I forecasted Inventory, Accounts Receivable and Accounts Payable to maintain the
same percentage of sales that the have had in the past.
All of the model inputs were put into the Discounted Cash Flow. Staring at Revenue, I
lowered my estimates for growth as the years extended out. I feel confident about
the 12% in 2006 and 2007, but Alltel will need to make another strategic purchase in
order to maintain that kind of revenue growth. I rounded out my 2011 growth to be
6.5% (an increase over the 5.7% consensus GRE).
I then chose a conservative operating margin to deliver Net Income, and used
historical depreciation rates, and a lofty capital expenditure rate (increasing at the
same rate of sales) to end at Free Cash Flow.
I used the traditional 10% discount rate and a slightly conservative 4% Terminal Free
Cash Flow rate to discount the sum of the cash flows.
My result was a $76.48 stock price. Combined with the price based off of the
multiples valuation technique, I arrive at a final stock price of $76.28
Technique
Model Valuation
Multiples Valuation
MEAN
Price
76.48
76.08
76.28
Projected Return: (76.28/67.44)-1=13.11+2.28= 15.39%
28
CONCLUSION
Based on my valuation results and analysis of the company, my final recommendation
is to buy Alltel’s stock.
The Pros Related to buying Alltel’s Stock:
1.) Alltel is the shining star of the Telecom Sector. It has outperformed both the
Sector and the S&P in the last five years.
2.) Alltel has a solid financial history including revenue and margin growth. Profit
margins are some of the best in the sector. Current, Coverage, and Leverage
Ratios are the best in the Sector.
3.) Conservative Models, Multiples, and Discounted Cash Flow all indicate that the
stock is undervalued in the current marketplace.
4.) Alltel has strategically aligned their company to focus on their Wireless line of
business, the only growing line of business in the sector.
5.) Unlike other large market capitalization telecom companies, Alltel is not buried in
the Capital Expenditures yet to pay off.
The Cons Related to buying Alltel’s stock
1.) The stock is the highest priced in the sector. While its valuation is solid, investors
may be weary of purchasing such an expensive Telecom stock.
2.) The spin off of the Wireline business while good in a strategy standpoint, will
eliminate diversity in their revenue and margin.
3.) Revenue is the largest growth driver for Alltel and record revenue projections
may not be achievable.
4.) Alltel is one of the smaller market cap telecom companies. They may experience
competitive pressures from the big players, translating to price erosion and softer
margins.
29
30
Appendix A: Alltel Model and Forecasted Data
ALLTEL MODEL
(millions)
FY
FY
FY
FY
FY
FY
FY
FY
2007E
2006E
2005E
2004
2003
2002
2001
2000
10,394
9,322
8,360.5
7,374.3
7,156.1
6,428.9
6,736.8
6,325.6
1,571
1,309
1,091.2
871.8
823.8
683.5
768.8
834.4
11,965.4
10,631.5
9,451.8
8,246.1
7,979.9
7,112.4
7,505.6
7,160.0
10,558.5
9,501.0
Revenues and sales:
Service revenues
Product sales
Total revenues and sales
Costs and expenses:
Cost of services (excluding depreciation)
3,274
2,983
2,747.3
2,374.2
2,273.6
2,039.0
2,269.1
2,269.5
Cost of products sold
1,854
1,545
1,281.9
1,075.5
1,043.5
891.3
907.9
840.1
SG&A
2,214
1,967
1,770.1
1,524.2
1,498.1
1,297.0
1,404.0
1,369.1
Depreciation and amortization
1,855
1,648
1,470.7
1,299.7
1,247.7
1,095.5
1,167.7
988.4
25
25
18.9
50.9
19.0
69.9
92.2
25.4
Total costs and expenses
9,221.6
8,167.9
7,288.8
6,324.5
6,081.9
5,392.7
5,840.9
5,492.5
Operating income
2,743.8
2,463.6
2,162.9
1,921.6
1,898.0
1,719.7
1,664.7
1,667.5
Equity earnings in unconsolidated
partnerships
-
-
36.3
-
-
-
57.0
120.5
Minority interest in consolidated partnerships
-
-
(57.8)
-
-
-
(71.8)
(97.2)
20
20
156.0
22.9
(3.2)
(5.3)
12.8
24.0
(375.00)
(375.00)
(331.4)
(352.5)
(378.6)
(355.1)
(268.5)
(292.6)
20.00
20.00
218.9
-
17.9
1.0
357.6
1,928.5
Income (BIT)
2,763.8
2,483.6
2,360.4
1,921.6
1,915.9
1,720.7
2,007.5
3,619.3
Income from continuing operations (BT)
2,408.8
2,128.6
2,185.0
1,592.0
1,534.1
1,360.3
1,751.8
3,350.7
Income taxes
898.50
793.95
816.2
565.3
580.6
510.2
704.3
1,385.3
1,510.34
1,334.61
1,368.7
1,026.7
953.5
850.1
1,047.5
1,965.4
26.0
19.5
376.6
74.2
19.5
(36.6)
Restructuring and other charges
Other income, net
Interest expense
Gain on exchange or disposal of assets and
other
Net Income from continuing operations
Income from Discontinued operations
31
1,510.34
1,334.61
1,394.7
1,046.2
1,330.1
924.3
1,067.0
1,928.8
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
1,510.2
1,334.5
1,394.6
1,046.1
1,330.0
924.2
1,066.9
1,928.7
Earnings per share:
Basic EPS from cont ops
4.07
3.63
4.12
3.34
3.06
2.97
3.36
6.25
Discont ops
0.00
0.07
0.06
1.16
0.00
0.00
0.00
0.00
0.05
0.00
0.06
(0.12)
3.40
4.27
2.97
3.42
6.13
6.20
Net income
Preferred dividends
Net income applicable to common shares
Gain on sale of discont ops
4.07
3.63
4.19
32.26
28.95
25.99
Diluted EPS from cont ops
4.03
3.59
4.08
3.34
3.06
2.96
3.34
Discont ops
0.00
0.00
0.07
0.06
1.15
0.00
0.00
0.00
0.00
0.00
0.05
0.00
0.06
(0.12)
3.40
4.26
2.96
3.40
6.08
311.5
312.5
311.2
312.3
310.80
315.0
313.70
Basic EPS
Basic Sales Per Share
Gain on sale of discont ops
4.03
3.59
4.15
3.81
3.62
4.17
31.89
28.62
25.70
Basic
370.91
367.24
363.60
Diluted
375.19
371.48
367.80
Inventory
233.3
207.3
184.3
156.8
122.1
138.5
163.8
239.9
12.5%
12.5%
1.98%
28.42%
-11.84%
-15.45%
-31.72%
0.00%
Inventory % so Sales
1.95%
1.95%
1.95%
1.90%
1.53%
1.95%
2.18%
3.35%
Accounts Receivable
1,322.2
1,174.8
1,044.4
912.7
890.0
1,018.3
1,241.2
1,273.6
12.5%
12.5%
14.4%
2.6%
-12.6%
-18.0%
-2.5%
#DIV/0!
11.05%
11.05%
11.05%
11.07%
11.15%
14.32%
16.54%
17.79%
682.0
606.0
538.8
448.2
479.8
413.7
522.1
688.4
12.5%
12.5%
0.2
-6.6%
16.0%
-20.8%
-24.2%
#DIV/0!
5.70%
5.70%
5.70%
5.44%
6.01%
5.82%
6.96%
9.61%
Service Revenue Growth
Product Sales Growth
11.50%
20.00%
11.50%
20.00%
13.37%
25.17%
3.05%
5.83%
11.31%
20.53%
-4.57%
-11.10%
6.50%
-7.86%
#DIV/0!
#DIV/0!
Total Sales and Revenue Growth
12.55%
12.48%
14.62%
3.34%
12.20%
-5.24%
4.83%
#DIV/0!
Gross Margin on Service Rev to Sales
68.50%
68.00%
67.14%
67.80%
68.23%
68.28%
66.32%
64.12%
Diluted
Diluted Sales Per Share
Wtd Avg shs outstanding
318.2
Chg YoY
Chg YoY
A/R % of Sales
Accounts Payable
Chg YoY
A/P % of Sales
Chg YoY
Gross Margin on Product Rev to Sales
Chg YoY
312.60
317.50
0.50%
0.86%
-0.66%
-0.42%
-0.06%
1.97%
2.20%
64.12%
-18.00%
-18.00%
-17.48%
-23.37%
-26.67%
-30.40%
-18.09%
-0.68%
0.00%
-0.52%
5.89%
3.30%
3.73%
-12.31%
-17.41%
-0.68%
32
SG&A to Sales
18.50%
18.50%
18.73%
18.48%
18.77%
18.24%
18.71%
19.12%
0.00%
-0.23%
0.23%
-0.33%
-0.50%
0.74%
-39.71%
-55.27%
Deprec/Amort to Sales
15.50%
15.50%
15.56%
15.76%
15.64%
15.40%
15.56%
13.80%
Operating Margin (pre int/tax)
22.93%
23.17%
22.88%
23.30%
23.78%
24.18%
22.18%
23.29%
-0.24%
0.29%
-0.46%
-0.12%
0.24%
-1.04%
-1.37%
23.29%
20.13%
20.02%
23.12%
19.31%
19.22%
19.13%
23.34%
46.80%
Chg YoY
Chg YoY
Operating Margin (pre tax)
Chg YoY
Tax Rate
0.11%
-3.10%
3.11%
-0.36%
-1.48%
-1.48%
3.13%
32.57%
37.30%
37.30%
37.36%
35.51%
37.85%
37.51%
40.20%
41.34%
33
Appendix B: DCF
Analyst
Ticker
DCF Valuation
Sara Jo Smith
AT
Discount Rate =
Terminal FCF
Growth =
Using CAPM
=Risk Free Rate+Beta (Market Premium)
=4+.95(10-4)
10.0%
4.0%
11/29/2005
CAPM Suggests using a 9.7% Discount Rate
Figure 26: Alltel’s Discounted Cash Flow Forecast
Simple Free Cash
Flow:
2005E
2006E
2007E
2008E
2009E
2010E
2011E
2012E
2013E
2014E
Termi
nal
Value
2015E
Revenue
% Growth
Operating Margin
Operating Income
(BIT)
Interest % of
Sales
Interest - net
9,452
14.62%
10,631
12.5%
11,965
12.5%
13,162
10.00%
14,149
7.5%
15,069
6.5%
15,973
6.0%
16,931
6.0%
17,862
5.5%
18,845
5.5%
19,787
5.0%
22.9%
23.2%
22.9%
22.5%
22.5%
22.5%
22.5%
22.5%
22.5%
22.5%
22.5%
2,162.9
2,463.6
2,743.8
2,961.4
3,183.5
3,390.5
3,593.9
3,809.5
4,019.1
4,240.1
4,452.1
3.5%
3.5%
3.1%
3.5%
3.5%
3.5%
3.5%
3.5%
3.5%
3.5%
3.5%
331.4
375.0
375.0
460.7
495.2
527.4
559.1
592.6
625.2
659.6
692.6
-
-
-
-
-
-
-
-
-
-
-
37.3%
37.3%
37.3%
37.3%
37.3%
37.3%
37.3%
37.3%
37.3%
37.3%
37.3%
816.2
794.0
898.5
932.8
1,002.7
1,067.9
1,132.0
1,199.9
1,265.9
1,335.5
1,402.3
1,394.6
33%
1,334.5
-4%
1,510.2
13%
1,568.0
4%
1,685.6
8%
1,795.1
6%
1,902.9
6%
2,017.0
6%
2,128.0
5%
2,245.0
5%
2,357.2
5%
1,470.7
1,647.9
1,854.6
2,040.1
2,122.4
2,260.3
2,395.9
2,370.4
2,322.1
2,449.8
2,473.4
(27.5)
690.0
1,225.0
12.96%
(23.0)
(26.0)
(28.2)
(29.9)
(31.4)
(32.8)
(34.3)
(35.7)
(37.1)
(38.4)
1,275.0
11.99%
1,340.0
11.20%
1,450.0
11.02%
1,558.8
11.02%
1,660.1
11.02%
1,759.7
9.50%
1,865.3
9.50%
1,967.8
9.50%
2,076.1
9.50%
2,179.9
9.50%
1,684.4
4%
1,998.9
19%
2,129.9
7%
2,219.3
4%
2,364.0
7%
2,506.3
6%
2,487.8
-1%
2,446.6
-2%
2,581.7
6%
2,612.4
1%
Other - (inc)/exp
Tax Rate
Taxes
Net Income
% Growth
'+
Depreciation/Amo
rt
'+/- Changes WC
Initial WC
'- Cap Ex (other)
Capex % of
sales
Free Cash Flow
YOY growth
1,612.8
34
#####
NPV of free cash flows
NPV of terminal value
Projected Equity Value
$13,701.8
$14,427.9
49%
51%
'06-10 Cash/Op's
28,129.8
Cash/Op's % of
Sales
Shares
Outstanding
367.8
Implied equity value per
share
$76.48
Current Price
$67.44
Upside/(Downside) to DCF
13.4%
35
17,680
27.2%