Verizon Communications, Inc. (NYSE: VZ) Telecommunications. Krause Fund Research Spring April 17 th, Recommendation: BUY

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1 Krause Fund Research Spring 2014 Telecommunications Recommendation: BUY Analysts Brock Tracey Eric Marth Tanner Hawks Jerry Studer Edward Ulreich Company Overview, Inc. (NYSE: VZ) is an integrated wireless communication company within the telecommunications sector that provides several different services to a wide range of customers. With the largest market share in the industry at 42.1%, Verizon Wireless provides wireless services on the nation s largest 4G LTE network and the most reliable 3G service that covers 97% of the U.S. population. Verizon s FiOS also provides the number one rated broadband service on the nation s largest Fiber Optic network. FiOS service also includes HD TV and home phone service to residential customers. Another segment is Verizon Enterprise Solutions which provides global IT service in 150 plus countries and to 99% of all Fortune 500 Companies. Stock Performance Highlights 52 week High $ week Low $45.08 Beta Value 0.64 Average Daily Volume (10 day) m Share Highlights Market Capitalization Shares Outstanding $ b 1.14 b Book Value per share $13.57 EPS 2013 $0.87 P/E Ratio Dividend Yield 4.5% Dividend Payout Ratio 52% Company Performance Highlights ROA 8.00% ROE 26.03% Sales $ b Financial Ratios Current Ratio 2.62 Debt to Equity %, Inc. (NYSE: VZ) Verizon Leads the Way April 17 th, 2014 Current Price $47.60 Target Price Range $51-$55 Industry Power Verizon has the largest market share in the wireless telecommunications industry. Their 4G LTE network covers more of the U.S. population than any other wireless provider. Their 4G network is the only network that is 100% 4G LTE, the most efficient technology available to customers. Their industry leading network expansion will allow them to capitalize on projected industry growth in the next five years. Wireless Growth The number of wireless devices is projected to continue to increase as well as the demand for wireless service. The development of tablets, e-readers and smartphones has dramatically influenced this demand. Verizon will benefit from these increases in wireless usage. There has also been an increase in cost conscious customers causing Verizon to adjust their contract strategy to meet these needs. Coupled with its network, new wireless plans that reduce costs to customers will attract more value orientated subscribers to Verizon services. These areas of growth will allow Verizon to continue to grow in a highly penetrated market. Vodafone Interest Acquisition Verizon increased its growth outlook by acquiring Vodafone s minority interest in Verizon wireless. This acquisition will create future value to shareholders. Verizon now has more control over its operating cash flows giving the company the freedom to allocate earnings that they would otherwise not have into improving its infrastructure, its technology, and redistributing these earnings to shareholders. Increasing Dividends In uncertain, capital markets, Verizon offers a safe investment due to its consistently increasing dividend. As the company s revenue is expected to grow, so are their dividends. These dividends provide a steady income for long-term investors. The company s high dividends show their value to their shareholders and the priority they put on increasing shareholder wealth. One Year Stock Performance

2 Page 2 Investment Summary Based upon our research and valuation models, we believe that Verizon s stock is currently undervalued, and therefore we have issued a BUY rating. We expect expansionary growth to continue following momentum from We also expect the telecommunications industry to benefit from this growth. With the largest market share in the wireless segment, Verizon Communications is the best positioned company in the industry. Increases in the demand for wireless connectivity will propel future growth in the wireless segment. Verizon has the most expansive 4G LTE network, leading the industry in wireless technology and has developed new contracts to attract more value-orientated customers, where the industry has seen a lot of growth. Their ability to increase revenues in this segment along with increased control over its earnings from the Vodafone interest acquisition, will help the company to beat earnings estimates in In the event of a severe market downturn, Verizon offers a safe investment because of their steady growth and favorable dividend policy. Economic Analysis GDP Real GDP indicates how fast profits are growing and the expected return on capital by measuring society s wealth. GDP reflects the overall health of the economy, which we believe will provide an outlook for the telecommunications industry and the future performance of Verizon. Interest Rates The telecommunications sector is a capital intensive industry due to the infrastructure required to transmit data, which makes interest rates an important factor. Interest rates affect a company's cost of capital, impacting their investment and capital expenditure decisions. The Federal Reserve has continued buying Treasuries at a decreasing rate and inflation has remained relatively low in 2014.We believe interest rates will reach 3.0%-3.5% by the end of 2014 due to rising inflation coupled with the completion of the Federal Reserve tapering program. 16 Verizon s continued plan to expand 4G LTE, FiOS, and its core networks will require significant amounts of capital. The rising interest rates will increase their cost of borrowing to fund these expansions. In addition rising interest rates is a concern for Verizon because 8% of its overall debt portfolio has a floating interest rate. These factors could slow their expansion plans and may restrict their funds for working capital, capital expenditures and acquisitions. In order to manage their exposure to future interest rate changes, during the fourth quarter of 2013, Verizon entered into forward interest rate swaps with a notional value of $2.0 billion. This allows Verizon to achieve a targeted mix of fixed and variable rate debt. 1 Regulation Verizon is subject to legislation that significantly impacts the way the company operates. Government regulation affects how much Verizon is able to charge their customers and how they can provide their services, ultimately impacting their profitability. Figure 1: Real GDP Growth 21 In the fourth quarter of 2013, Real GDP grew 2.6% at an annual rate, compared with 4.1% in the third quarter provided positive growth in GDP during all four quarters, which resulted in an annual GDP growth of 1.9%. This compares to real GDP growth in 2011 and 2012 of 1.8% and 2.8%, respectively. 15 Moving forward, we expect the US GDP growth to improve to 2.0%-2.5% by the end of As we move past the recent recession, we believe GDP growth will continue to climb towards 3% in the future and remain relatively stable. Real GDP growth will positively affect large US carriers, such as Verizon, and continue to increase demand for networking and data applications. Figure 2: Wireless Data Growth Leads to Spectrum Deficit 29 The FCC tightly regulates the growing wireless communications sector that Verizon operates in. As wireless communications becomes the future of the telecommunications industry, the lack of spectrum is a top priority for providers. Wireless spectrum is a finite resource, which makes acquiring it a major factor in Verizon s ability to grow. Verizon must obtain licenses from the FCC to secure appropriate spectrum in order to support the enormous growth of bandwidth-intensive wireless data services. The U.S. government is currently making more spectrum available for purchase. Congress previously blocked spectrum that was to be used by broadcast television providers. This spectrum will be up for auction come February 2015 and the FCC

3 Page 3 will be holding an incentive auction to make this spectrum available for wireless broadband use. Figure 2 shows the importance more spectrum being made available to wireless companies as there is already 90 MHZ deficit and a predicted 275 MHz deficit in 2014 at current spectrum levels. Verizon is actively working with the FCC through incentive auctions and other means to ensure they obtain the spectrum they need to continue to grow and provide their consumers with high-quality service. Obtaining more spectrum will be an increasing need for Verizon as connections grow and usage of wireless broadband services grow. The usage of broadband services is especially concerning because it uses more bandwidth and faster speeds to remain competitive. This spectrum crunch will make it harder for smaller providers to stay in business, leaving a major player like Verizon in a great position to increase market share. Capital Markets Outlook Telecommunication equities tend to closely follow other large cap equities in the S&P index as seen in Figure 3. Verizon stock price exhibits a correlation of to the S&P We expect the market in 2014 to continue to grow following momentum from the large boom in Analysts project the S&P index to grow about 6% this year. We expect GDP to grow 2-3% over the next year and interest rates to rise to 3-5%. These rising interest rates may affect telecommunications companies ability to re-invest money into their infrastructure. Increasing interest expense may also hurt earnings by decreasing margins. Despite these factors, high dividend producing stocks with steady growth rates like Verizon may be a safe investment in an uncertain market due to the Federal Reserve tapering program. Commission. The role of the FCC is to maintain competition in the telecommunications industry through limiting spectrum licensing in geographical areas and keeping companies from making large mergers to prevent monopolization. 7 Markets and Competition Because of the fast and large growth of wireless technology, there is more need for services provided by wireless providers than ever before. In October 2013, market penetration of the postpaid wireless service subscribers reached 104%. 3 Although penetration is over 100% and the growth of postpaid subscribers is expected to slow down, there is still room for growth in other segments of the industry. With the development of game consoles, tablets and E-readers, the number of connected devices per person is expected to grow another 6% in 2014 and into the future as figure 4 shows. 4 There also has been an increase in pre-paid subscribers as customers look for cheaper ways to stay connected. In October 2013, Verizon saw pre-paid subscribers grow to 5.9% of its total subscriber base, the highest since Additionally, companies look to expand their wireline service by providing high speed internet and TV service along with existing wireline voice service. Telecommunications companies will expand and fight each other to gain more revenue in these areas. The U.S. wireless telecommunications market is a highly concentrated within the industry. The four major players in the industry (AT&T, Verizon, Sprint-Nextel and T-Mobile) earn 94.7% of the entire industry revenue. 4 These companies take so much of this market share due to expansion through mergers and acquisitions of smaller companies. These mergers provide new customers along with expansion into new markets making it hard for new business to enter the market. The FCC limits number of spectrum licenses in geographical areas for wireless service which creates another barrier of entry. These factors make competition within the industry very high. Wireless providers participate in a constant battle against each other to provide the best service with the most coverage and the latest smartphones at the cheapest prices. Depending on the customer preference, any of these factors can influence one to choose one service provider over the other. Figure 3: S&P 1500 and Telecommunications 23 Industry Analysis Integrated telecommunications is an extremely competitive and concentrated industry that includes integrated providers of both fixed-line and wireless services offering voice, data and highdensity data transmission services. The telecommunications industry is heavily regulated by the Federal Communications Figure 4: Mobile Internet Connection Growth 4 There has been a decline in wireline voice as it becomes obsolete because of wireless services. More and more people are cutting their landline service and telecommunications companies have reacted by selling off most of their wireline assets. This decrease however is expected to be offset from revenues from video and broadband services. Fixed broadband subscribers are expected to

4 Page 4 reach 93 million by 2017, up 12 million from Companies are trying to obtain this market share by adopting the best technology to deliver the best service. Adoption of fiber optic technology has proved to be the most efficient and fastest option for broadband and TV services. Verizon s FiOS network is 100% fiber and is ranked as the number one ISP (based on download and upload speeds) according to PCmag.com. 8 Competition for Verizon in this area includes integrated telecommunications companies like AT&T and cable/broadband providers like Comcast. Competitors AT&T: Verizon s main competitor is AT&T. The company has less market share than Verizon in the wireless segment at 33% versus Verizon s 42%. However, AT&T has a greater market share of the wireline segment at 54% versus Verizon s 36%. This is shown by the nearly double amount of subscribers to AT&T s broadband service. We believe that Verizon s higher market share in the growing wireless sector put s Verizon in a better position. This is shown by Verizon s higher EPS and ARPU. Sprint: Sprint has the third largest market share of the wireless segment. Sprint has experienced some revenue growth in pre-paid service subscriptions. However, net income and EPS have been negative due to the high amount of debt and capital expenditures it has taken on. Sprint does not pose much of a threat to Verizon s current market share. T-Mobile: T-Mobile is the fourth major player in the wireless carrier industry. Recently, they have announced that they will only sell pre-paid monthly connections. This may pose a threat to Verizon s ability to attract value orientated customers. Other Competitors: Other competitor s Verizon faces are cable companies like Comcast and Time Warner Cable. In the wireline segment, potential growth for Verizon may be hindered by these businesses because of their strong presence in the industry. T S VZ Recent Developments and Trends Integrated telecommunications companies depend on several factors to facilitate their success: having a high profile with name recognition to customers, adapting to new technology quickly, constantly improving their infrastructure through acquisitions, and being able to preserve and build their customer base. Because of the high levels of competition, the maintenance and growth of wireless company customer bases have become a priority and they have taken action to do so. Price War To combat high market saturation, carriers began to introduce new plans to be more value orientated. T-Mobile started to only offer prepaid, no-contract monthly plans to capitalize on pre-paid customer growth as more customers look for the same features of post-paid contracts at cheaper prices. Additionally, early this year T-Mobile announced that it would cover early termination fees up to $650 for customers that wish to switch to T-Mobile from competitors like Verizon, AT&T, and Sprint. 9 This sparked a price war among the major competitors as each company began revamping the structure of their family wireless plans. Both Verizon and AT&T responded by offering more data at a reduced cost by introducing shared data plans. Both companies were reluctant to make changes due to decreasing margins. Technology and 4G LTE Expansion The other trend wireless companies are using to gain customers is improving their technology. Most recently, AT&T and Verizon have been able to adopt 4G LTE as the standard for high quality service in the industry. 4G LTE is the fastest and most efficient service available placing Verizon and AT&T in strong positions because their 4G LTE technology covers the two highest portions of the US population in the industry at 303 million and 250 million respectively. 17 Verizon s 4G network is the only 100% 4G LTE network and is the nation s largest with coverage to 95% of the population. 2 They also look to gain more customers by having contracts with producers of latest smartphone and tablet technology that can be enhanced through their service. Market Cap B 32.24B B Customers M 47.02M M Revenue B 35.49B B EBITDA 48.87B 4.48B 48.57B EPS P/E 9.68 N/A ARPU Churn Rate 1.37% 1.94%.97% Figure 6: Coverage Map 30 Figure 5: Competitor Table

5 Page 5 Industry Outlook We expect the integrated telecommunications industry to keep its steady growth in the future. As population grows and the demand for connected devices increases, wireless revenue will grow as well. We expect the industry to grow 5-6% annually over the next 5 years. We expect wireline voice connections to continue to decline in 2014 at 9% as more customers opt for wireless connections instead. 5 This loss, however, should be offset by increases in revenues from broadband and video entertainment services. Company Overview Verizon is a provider of communications, information and entertainment products and services to consumers, businesses and governmental agencies. Headquartered in New York, Verizon reported 120 billion in revenues with an employee base of over 176,800 at year end December 31, It operates in two primary segments, Verizon Wireless and Wireline: 66% of revenues coming from Wireless and 34% from Wireline. 8 Verizon Wireless communications products and services include wireless voice and data services and equipment sales. Wireline communications products and services include voice, Internet access, broadband video and data, Internet protocol network services, network access, long distance and other services. more value to stockholders. These increases are attributable to increases in wireless retail and service revenue and decreases in SG&A of 16% in Dividends Verizon has consistently paid dividends for 30 years dating back to This consistent dividend stream provides evidence of consistent profitability and growth. In addition to consistent dividends, as Figure 8 shows, Verizon has increased their annualized dividend per share for 8 consecutive years. Last year the board approved a 2.9% increase in dividends and we expect that to continue in the coming years. The acquisition of the minority interest of Vodafone will free up Verizon s operating cash flows permitting them to steadily increase their dividends in 2014 and beyond. Verizon s dividend policy makes them a solid investment because it shows good health of the company and the quality of its earnings Figure 8: Yearly Dividend Table Vodafone Acquisition During February 2014, Verizon completed a $130 billion deal to purchase Vodafone s 45% interest in Verizon s Wireless segment. To complete the deal, Verizon issued Vodafone shareholder s 1,275 million shares of common stock, and paid the rest in cash. 13. The Cash was acquired from the proceeds of their debt issuance in 2014 of $6.6 billion and their 2013 debt issuance of $49 billion. 18 As a result, at the end of 2013, Verizon s cash balance was at $53.5 billion, and long-term debt was $89.7 billion. Now that the deal is completed, we expect the balance sheet to reflect a large decrease in cash, an increase in net intangibles and an increase in common shares outstanding. The increase in debt is expected to be paid off with continued revenue growth in the wireless segment along with greater retained earnings as a result of the Vodafone purchase. Verizon also approved a plan to repurchase 100 million shares of stock that could be used to offset a portion of the increase from the Vodafone purchase. 12 Figure 7: Verizon Revenue Distribution 28 Corporate Strategy Verizon s strategy is to provide its customers with the most innovative and latest communications technology to improve the way its customers live, work and play. 2 Through Verizon s Shared Success program for corporate responsibility, they look to create solutions for problems in education, healthcare and energy management by using their technology. The Shared Success program helps Verizon to enhance their reputation and brand while simultaneously creates new opportunities to enter new markets. Through these strategies, Verizon hopes to increase shareholder trust and value. Financial Summary Verizon has historically had strong financial performance as demonstrated by fiscal year 2013 where Verizon beat earnings estimates by 1.75%. 27 Total 2013 EPS was $4.00, up from $3.70 in Verizon Wireless grew service revenue by 8.3% in 2013 up from 2012 growth of 7.7% Verizon also grew cash flows from operations year to year by 23.3%. The increase in free cash flow will allow for Verizon to increase capital expenditures and return Life Cycle Verizon operates under two segments that are at different points in their life cycles. Wireless is still in a growth phase and we believe that it will continue to grow this segment because of its strong position in the market. As more customers wirelessly connect their devices, growth opportunities will present themselves in prepaid subscribers and wireless devices. Verizon plans to invest significant capital to make sure it is in a good position to take advantage of this growth opportunity. The Wired segment has reached maturity and is continuing to decline. The maturity of the wired sector is offset by the growth of the wireless sector as customers transition to wireless. For that reason we believe Verizon will be in a growth phase in the upcoming years. Business Segments Wireless Verizon Wireless communications products and services include wireless voice and data services and equipment sales, which are provided to consumer, business and government customers

6 Page 6 across the United States. 1 Verizon Wireless revenues grew 7% in 2013 making it the fastest growing segment of Verizon due to increased demand of wireless connectivity for smart phones. Verizon Wireless is the largest wireless service provider in the United States as measured by retail connections and revenue. At December 31, 2013, Verizon Wireless had million retail connections, a 4.5% increase and 2013 revenues of approximately $81.0 billion with $69.79 average monthly revenue per customer. This is compared to Verizon s closest competitor AT&T with $70 Billion in revenue and $6.33 average monthly revenue per customer. Recently Verizon finalized a stock purchase agreement with Vodafone to acquire their indirect 45% interest in Verizon Wireless giving them 100% control over the wireless segment revenues. We believe that Verizon Wireless expanding 4G LTE network, new plans, and acquisition of the 45% minority interest from Vodafone will propel growth in 2014 and forward. We expect revenues to grow 5.5% in 2014 and retail connections to grow 4.5% in This segment provides the best opportunity for growth and in a market experiencing growing demand. Wireline Wireline s voice, data and video communications products and enhanced services include broadband video and data, corporate networking solutions, data center and cloud services, security and managed network services and local and long distance voice services. Verizon provides these products and services to consumers in the United States, as well as to carriers, businesses and government customers both in the United States and in over 150 other countries around the world. 1 The Wireline segment continued to decline in 2013 with revenues at $39 billion which is down 1.4% from Wireline is separated by primary customer s targeted- mass markets, global enterprise, and global wholesale. In addition to their wide array of wireless plans, Verizon offers a variety of wireless services such as internet access for all devices including notebook computers and tablets, and messaging services for text, video and picture. Recently Verizon has taken initiatives to further develop its video services to increase efficiency of streaming. We believe that wireless services will continue its strong growth compared to other services as it did in 2013 by 6.8%, due to increasing demand for wirelessly connected devices and video streaming. Mass Markets Mass Markets provide broadband services, local exchange and long distance voice services to residential and small business subscribers. Mass Markets is primarily driven by Verizon s FiOS internet and video service technologies. FiOS is offered in varying downstream and upstream processing speeds, the fastest being FiOS Quantum. The high speed of FiOS will put Verizon in a good position to meet the growing number of customers who power more devices and stream more video in coming years. 1 It is expected that the already 45% of mass market subscribers that are connected to FiOS Quantum will continue to grow. 1 Global Enterprise Global Enterprise offers Strategic services, including networking products and solutions, advanced communications services, and other core communications services to medium and large business customers, including multinational corporations, as well as state and federal government customers. 1 Figure 8 shows that Global Enterprise s revenues are declining due to Verizon s initiative to transition customers off of their Core services to next generation IP services. These next generation services offer greater security when communicating over the web. Mass Markets has become the leading service within the Wireline segment accounting for 44% of Wireline revenues in Despite the continued growth in mass markets from FiOS subscribers, we believe that Wireline revenues will continue to decline in 2014 at 1.4% due to large declines in global enterprise and global wholesale. Products and Services Verizon operates America s largest 4G LTE network and most reliable 3G network. In addition they provide converged communications, information and entertainment services over America s most advanced fiber-optic network, and deliver integrated business solutions to customers in more than 150 countries. 2 Their services are separated by wireless, mass markets, global enterprise, and global wholesale. Figure 6 shows, each services respective revenue growth for Wireless Services Verizon offers its wireless services on a postpaid and prepaid basis. Retail postpaid accounts represent retail customers under contract with Verizon Wireless that are directly served and managed by Verizon Wireless and use its branded services. The postpaid account plans include More Everything plans, single connection plans, plans tailored to the needs of corporate customers, as well as legacy single connection plans and family plans. 1 Wireless plans are designed to meet the needs of customers regardless of device. Figure 9: 2013 Verizon Services Growth Global Wholesale Global Wholesale provides communications services including data, voice, local dial tone and broadband services primarily to local, long distance and other carriers that use Verizon s facilities to provide services to their customers. 1 The services included in Global wholesale are data, voice, and local services. New Ethernet connectivity in the United Sates represents the largest data growth in wholesale because of Verizon s continued effort to improve the speed of its technologies.

7 Page 7 New Products and Services New Wireless Plans With the impending price war created by industry competitor T-Mobile, Verizon has reacted by adjusting the structure of its wireless contracts. On February 13 th 2014 Verizon introduced the More Everything plan to replace its Share Everything plan. The new plan offers domestic unlimited voice minutes, unlimited domestic and international text, video and picture messaging, cloud storage and a single data allowance that can be shared among up to 10 devices connected to the Verizon Wireless network. In addition to the More Everything plan Verizon introduced Verizon Edge which provides a device payment plan option so customers can upgrade their devices faster. The new plan stipulates that a customer can upgrade their device after six months if 50% of the device is paid or they can upgrade after 1 year if the device is 100% paid. We believe these new plans will contribute to prepaid account growth of 8.5% in 2014 and forward. 19 4G LTE Network Expansion Verizon has significantly expanded its 4G LTE network to 95% of the American population in more than 500 markets covering approximately 305 million people. This expansion is replacing its old 3G network which will provide more efficient connectivity for customers and reduce costs to Verizon. The 4G LTE network provides higher data throughput performance compared to 3G with averages of up to 12 Mbps and 3.1Mbps, respectively. 26 Verizon plans to allocate $16.5-$17 billion of capital expenditures to continue the expansion and improvement of speed to gain competitive advantages. The 4G LTE Network will enable Verizon to implement a unified video strategy to take advantage of the growth opportunity. 1 Catalysts for Growth and Change For future growth, Verizon needs to capitalize on potential growth in the wireless segment to value-orientated customers. The implementation of their More Everything Plan that gives unlimited talk and text and an allotted amount of shared data at a discounted cost can attract more family customers. Verizon also needs to capitalize on the growing pre-paid subscriber market. Verizon looks to gain revenue on the pre-paid subscriber market by providing more allotted data than other pre-paid services. Verizon will have to be able to keep their current customers and prevent them from switching services. The company continues to expand its coverage map and 4G LTE service, making their service more valuable to existing customers. They will also have to grow their revenue from these existing customers. Verizon plans to use a portion of their freed up cash flows to increase their average revenue per customer through their more efficient 4G LTE Network. Obtaining full control of the wireless segment from Vodafone will allow Verizon to retain more of their revenue from the wireless segment presenting a great growth opportunity in the coming years. Although Verizon has no immediate plan to expand their FiOS internet, TV and voice service, they look for further penetration in the markets they already serve, too. Currently, FiOS broadband service and FiOS TV make up 39% and 35%, respectively. 5 By improving the quality of these services they will be able to obtain more market penetration. This will allow them to expand their services to new markets in the future. Key Investment Positives and Negatives Positives Verizon is well positioned for future growth because of its industry leading 42% market share of the wireless market, a vastly growing industry expected to expand its revenues by 5% in Verizon is also the only wireless carrier whose 4G network is 100% 4G LTE, covering 95% of the US population, which is the best technology available to customers. 10 Verizon s strong 4G LTE network will enable them to take advantage of industry growth by meeting growing demands for faster wireless connection. In addition, the steady expansion of Verizon FiOS provides some optimism in the wireline segment, through its expanding broadband and TV services, Verizon s recent acquisition of Vodafone s minority interest in Verizon wireless is going to deliver future value to shareholders. Verizon has more control over its earnings, allowing them to increase their dividends to shareholders as they have done in the past 7 years. In addition, Verizon will be able to reinvest more capital into the business to capitalize on the growing wireless industry through improvements of 4G LTE technology, more reliable video streaming technology, and security in mobile commerce. These initiatives will help to increase cost efficiency and result in higher margins. The newly waged price war presents an opportunity for Verizon to increase its number of prepaid subscribers. In 2014 they introduced two new plans to accommodate the shift towards a value oriented customer base. Negatives The wireline segment is a major weakness of Verizon. Customers are consistently dropping their landline phones which has been decreasing yearly revenue for Verizon wireline at a growing rate most recently 1.4% in FiOS has been expanding, but it has limited growth potential because the services are provided in limited locations. Verizon at this time has no immediate plans to expand its FiOS locations which will slow the overall growth of FiOS. Although Verizon is the industry leader, other players are catching up to them. Customers are showing little loyalty and willing to move to other providers for cheaper prices because of the industry price war and no recent breakthroughs in device technology. The FCC regulations on the telecommunication industry can constrict Verizon s growth. In order to capitalize on the growing demand for wireless connectivity, Verizon will need to obtain more wireless spectrum from the FCC. The FCC is strict in granting additional spectrum, and has to approve any acquisitions that Verizon may wish to take to acquire more spectrum. If Verizon is unable to gain more spectrum through auctions and acquisitions, they will be unable to support their customer base s wireless demands. This will constrain growth and can result in high volumes of customers dropping Verizon as their wireless provider

8 Page 8 Valuation Analysis In order to obtain the most accurate target price of Verizon we used three different valuation models. The first and most telling model we used was the discounted cash flows (DCF) and economic profit (EP) methods which gave us a target price of $ Second we used the dividend discount model (DDM), which gave us a target price of $ Finally we did a relative valuation using 2014 and 2015 P/E ratios of comparable firms yielding a target price of $48.25 and $49.11 respectively. Revenue Decomposition The foundation of our valuation is our revenue forecasting. We divided Verizon s revenue into its two business segments wireless and wireline. We further broke down wireless into service revenues and equipment sales. We divided wireline into mass markets, global enterprise, and global wholesale. Historically Wireless has comprised 66% of all revenues for Verizon and we expect that number to increase to 73% by We believe wireline will continue to decrease as customers forego their wired connectivity for wireless. We expect mass markets to continue to grow in 2014 at 4% because of Verizon s continued expansion of FiOS. This will be offset by the sharp declines in global enterprise and global wholesale in 2014 of -4.5% and -6.1% respectively. We believe that our projected losses in total wireline revenues of -1.4% in 2014 will be offset by the continued growth in wireless revenues of 5.5% in Subscribers will be attracted to Verizon s industry leading 4G LTE network and its new contracts growing its prepaid subscribers by 8.5%. We believe these developments will grow total operating revenue by 3.2% in Although we expect continued growth in total operating revenues, we believe that the rate at which they grow will decline year to year to a continue value growth rate of 1.7% as the telecommunications industry becomes more saturated. Net Income and Free Cash Flows A major assumption driving our model is Verizon s recent acquisition of the 45% minority interest Vodafone held in Verizon Wireless. Finalizing the deal at the beginning of 2014 eliminated the minority interest expense that was reducing Verizon s net income. In spite of a projected 4% rise in SG&A in 2014 from 2013 because of new contracts, we believe that the elimination of the minority interest expense will grow net income to $14.8 billion in 2014 from $11.5 billion in Beyond 2014 Net income is projected to grow at an average of 4%. The acquisition will allow Verizon more control over its cash flows. Going forward we expect Verizon to increase dividends by 2.9% in 2014, and continue to increase year over year to $2.37 per share in 2018 from $2.09 in In addition we project that Verizon will use its additional cash flows to reduce its long term debt at a steady rate of 5% per year and repurchase.10% of its outstanding shares every year. In 2014 Verizon authorized a 3 year repurchase plan that allows for the repurchase of as many as 100 million shares. 24 The CFO of Verizon publicly announced that they are unlikely to repurchase a significant amount of share just like their last 3 year repurchase plan when they only repurchased 3.5 million shares. For this reason we have forecasted minimal reductions of common stock in 2014 and forward. Instead of repurchasing shares our model projects that Verizon will use its increase in free cash flows for capital expenditures. The industry is highly saturated and Verizon will need to better its infrastructure to meet growing demand of faster connectivity. We project that Capital expenditures will increase to $16.75 billion in 2014 and will reach levels of $17.5 billion in 2018 to improve their infrastructure and video streaming technologies. Weighted Average Cost of Capital (WACC) Weighted average cost of capital (WACC) was used in our discounted cash flows and economic profit calculations to determine our target price. To obtain Verizon s WACC we calculated and average beta of.64 an average of 4 different timeframes of weekly betas. We assumed a risk free rate of 3.52% from the 30yr treasury yield and an implied market risk premium of 5.15%. By using CAPM we obtained a cost of equity of 6.81%. For the cost of debt we obtained a pretax cost of debt of 5.23% by averaging Verizon s three longest maturing bonds. 25 We got an after tax cost of debt of 3.43% by multiplying pretax cost of debt by Verizon s average marginal tax rate of 34.42%. This gave us a final WACC of 5.61%. Discounted Cash Flows (DCF) and Economic Profit (EP) We believe DCF and EP provide the best estimate of target price because they represent the cash flows that a company s investors are most likely to receive. From our calculations of DCF and EP we obtained a target price of $ This target price represents a 15.11% premium making Verizon s stock undervalued. We believe that this is an accurate forecast of Verizon s target price. We assumed a continuing value growth rate of 1.7%, a continuing value ROIC of 11.03%. Our continuing value ROIC was obtained under our belief that Verizon has a competitive advantage in its 4G LTE network and increased control of capital expenditures to advance its wireless technology. Dividend Discount Model (DDM) Verizon has a high dividend per share that artificially inflates the target price our dividend discount model predicts. We obtained a target price of $63.48, which is outside of our target price range. We predict that Verizon will continue its trend over the past 7 years by increasing its dividends per share by 2.9% per year. In our calculation we assumed continuing value growth of 1.7% and continuing value ROE of 13.63%. Relative P/E Model Within the telecommunications industry Verizon only had one comparable competitor to obtain a relative price. We used our forecasted 2014 EPS of 3.59 and 2015 EPS of 3.72 to obtain a relative price of $48.25 target price in 2014 and $49.08 in AT&T had a comparable 2014 and 2015 P/E of 13.5 and 12.8 compared to Verizon s projected 13.4 and Although the target price obtained from our relative P/E model is hovering around our projected price range we do not believe this is a good prediction of future price. We were only able to compare Verizon to AT&T because other competitors within the industry are either unprofitable or are heavily concentrated in the wireline sector of the industry making them bad comparisons.

9 Page 9 Sensitivity Analysis The target prices that we determined in our model are sensitive to the key assumption variables that we obtained. In order to determine how sensitive our valuation is to changes in these variables we conducted 6 sensitivity analyses to determine price ranges given different ranges of our key assumptions. WACC VS CV Growth Our target price is highly sensitive to changes in WACC VS CV growth assumptions. The table demonstrates the strong impact our WACC calculation has on the models projected target price. A.5% increase or decrease in WACC results in about a $13.50 change in target price. This level of sensitivity is expected for Verizon because of its capital-intensive business requirements. This is an important analysis to Verizon because growth will require increases in capital, which will change the firms WACC. Beta VS CV Growth Changes in assumed beta provide volatile target prices for our model. We assumed a beta of Beta of.64 to calculate WACC. The beta sensitivity table shows that.05 increases or decreases to beta change the target price roughly $4.00. This relatively small deviation shows that we have accurately reflected Verizon s risk in our model.. CV ROIC VS WACC This sensitivity analysis is important because the firm needs to maintain a higher ROIC compared to its WACC to provide value to its shareholders. The table demonstrates low sensitivity in target price, projecting about $1.00 change in price given a 0.50% change in ROIC. Given Verizon s consistent ROIC in the past, we do not expect any significant changes to our model. Cost of Equity VS Cost of Debt WACC is a crucial assumption to the Verizon forecast. Our sensitivity table shows that WACC is more sensitive to the cost of equity calculation. The capital structure of Verizon is currently 64.47% equity and 35.53% debt. This explains WACC S greater sensitivity to the cost of equity assumption. The table shows that our projected range of WACC is achievable in less than a +/- 0.5% range of equity and debt. We believe that our WACC assumption is safe given our macroeconomic analysis to determine our cost of equity. COGS/Sales VS CV Growth and SGA/Sales VS CV Growth The respective ranges of these two income statement accounts show that Target price has lower sensitivity to these assumptions compared to other key variables. Given a 1% change in either account, compared to.25% change in growth, keeps the target price within a respective range of our target price range. This shows that Verizon is able to maximize shareholder value from its profits, an important feature in a value competitive industry.

10 Page 10 Important Disclaimer This report was created by students enrolled in the Applied Equity Valuation (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report. Sources 1 Verizon K 1?SessionID=HEqV6D7Zn4kwYa-&ID= Verizon company Website 3 Net Advantage Industry Report Wireless Communications/Figure 4: Wireless Device Growth age/showindustrysurvey.do?code=tws 4 IBIS World Industry Reports Wireless Telecommunications = Net Advantage Industry Report Wireline Telecommunications age/showindustrysurvey.do?code=twn 6 IBIS World Industry Report Wired Telecommunications = Federal Communications Commission Website 8 Verizon News center - #1 ISP by PCmag.com 9 Fierce Wireless T-Mobile Fuels Pricing War 10 Verizon Wireless 11 Cisco Global Mobile Data Forecast 12 Bloomberg Verizon Repurchase plan 13 Verizon Vodafone Purchase acquisition-of-vodafone-stake-in-vzw-complete/ 14 Verizon Dividend History 15 GDP Announcement 16 Fed Tapering article Fed-Tapering-And-Its-Impact-On-The-Markets.htm 17 4G LTE Coverage 18 Verizon 2013 Debt Issuance billion-bonds-in-largest-company-offering-ever.html 19 Verizon Pre Paid Plans html 20 Market Share Capital Outlook 21 Figure 1: Real GDP Growth 22 Bloomberg Data - Verizon/S&P Correlation 23 Figure 3: S&P and Telecommunications Trends onthlyinvestmentreview.do 24 Bloomberg Share Repurchase Plan 25 Morning Star Verizon Bond Information 26 Diffen - 4G LTE Performance Data 27 Bloomberg- Verizon estimates ker=vz 28 Figure 7: Thomson One: Verizon Overview en&brandname= 29 Figure : CNN Spectrum Crunch id=sf_t_lead 30 Superiod Verizon 4G Coverage Map

11 Page 11 Key Assumptions of Valuation Model Ticker Symbol VZ Current Share Price 47.6 Fiscal Year End Dec. 31 Assumptions: Risk Free Rate 3.52% Average Beta 0.64 Equity Risk Premium 5.15% Cost of Equity 6.81% Pre-tax Cost of Debt 5.23% Marginal Tax Rate 34.42% After tax Cost of Debt 3.43% Weight of Debt 35.46% Weight of Equity 64.54% WACC 5.61% CV ROIC 11.03% CV Growth 1.70% CV ROE 13.66% Target Price $ COGS/Sales 38.00% SG&A/Sales 26.00%

12 Revenue Decomposition (In Millions) Page 12 Fiscal Years Ending Dec. 31 Dec '11 Dec '12 Dec ' E 2015E 2016E 2017E 2018E Wireless Retail Service 56,660 61,440 66,334 70,977 75,591 79,370 82,942 85, % 8.44% 7.97% 7.00% 6.50% 5.00% 4.50% 3.50% Other Service 2,497 2,293 2,699 2,739 2,767 2,801 2,829 2, % -8.17% 17.71% 1.50% 1.00% 1.25% 1.00% 1.00% Service revenue 59,157 63,733 69,033 73,717 78,358 82,172 85,772 88, % 7.74% 8.32% 6.78% 6.30% 4.87% 4.38% 3.42% Equipment and other 10,997 12,135 11,990 11,750 11,398 11,170 10,946 10, % 10.35% -1.19% -2.00% -3.00% -2.00% -2.00% -2.00% Total Wireless 70,154 75,868 81,023 85,467 89,755 93,342 96,718 99, % 8.14% 6.79% 5.48% 5.02% 4.00% 3.62% 2.80% Consumer Retail 13,606 14,043 14,737 15,326 15,786 16,181 16,585 17, % 3.21% 4.94% 4.00% 3.00% 2.50% 2.50% 2.50% Small Business 2,731 2,659 2,591 2,539 2,488 2,439 2,390 2, % -2.64% -2.56% -2.00% -2.00% -2.00% -2.00% -2.00% Mass Markets 16,337 16,702 17,328 17,866 18,275 18,620 18,975 19, % 2.23% 3.75% 3.10% 2.29% 1.89% 1.91% 1.93% Strategic Services 7,575 8,052 8,420 8,673 8,889 9,067 9,158 9, % 6.30% 4.57% 3.00% 2.50% 2.00% 1.00% 1.00% Core 8,047 7,247 6,283 5,372 4,553 3,836 3,218 2, % -9.94% % % % % % % Global Enterprise 15,622 15,299 14,703 14,045 13,442 12,903 12,376 11, % -2.07% -3.90% -4.48% -4.29% -4.01% -4.08% -3.45% Global Wholesale 7,973 7,240 6,714 6,304 5,920 5,559 5,220 4, % -9.19% -7.27% -6.10% -6.10% -6.10% -6.10% -6.10% Other % % -5.91% -5.00% -5.00% -5.00% -5.00% -5.00% Total Wireline 40,682 39,780 39,223 38,669 38,068 37,491 36,960 36, % -2.22% -1.40% -1.41% -1.55% -1.52% -1.42% -1.08% Intersegment revenues 1,330 1,201 1,166 1,143 1,120 1,097 1,075 1, % -9.70% -2.91% -2.00% -2.00% -2.00% -2.00% -2.00% Total operating revenues 112, , , , , , , , % 4.18% 3.91% 3.18% 2.93% 2.32% 2.14% 1.70%

13 Page 13 Subscriber Decomposition (In Thousands) Fiscal Years Ending Dec. 31 Dec '11 Dec '12 Dec ' E 2015E 2016E 2017E 2018E Wireless Retail connections 92,167 98, , , , , , , % 6.58% 4.65% 4.50% 4.25% 4.00% 4.00% 4.00% Retail Postpaid Connections 87,382 92,530 96, , , , , , % 5.89% 4.56% 4.25% 4.10% 3.90% 3.90% 3.90% Retail Prepaid Connections 4,785 5,700 6,047 6,561 6,991 7,376 7,780 8, % 19.12% 6.09% 8.50% 6.56% 5.50% 5.48% 5.46% Retail Connections Churn 1.26% 1.19% 1.27% 1.30% 1.40% 1.25% 1.25% 1.25% -8.70% -5.56% 6.72% 2.36% 7.69% % 0.00% 0.00% Average Revenue per Account $ $ $ $ $ $ $ $ % 2.13% 2.13% 1.18% 0.88% 0.09% -0.27% -1.05% Wireline Total Voice Connections 24,137 22,503 21,085 20,067 19,014 18,357 17,806 17, % -6.77% -6.30% -4.83% -5.25% -3.46% -3.00% -3.00% Total Broadband Connections 8,670 8,795 9,015 9,195 9,379 9,567 9,758 9, % 1.44% 2.50% 2.00% 2.00% 2.00% 2.00% 2.00% FiOS Internet Subscribers 4,817 5,424 6,072 6,497 6,887 7,231 7,593 7, % 12.60% 11.95% 7.00% 6.00% 5.00% 5.00% 5.00% FiOS Video Subscribers 4,173 4,726 5,262 5,736 6,194 6,628 7,059 7, % 13.25% 11.34% 9.00% 8.00% 7.00% 6.50% 5.50% Total Wireline Customers 41,797 41,448 41,434 41,495 41,474 41,783 42,216 42, % -0.83% -0.03% 0.15% -0.05% 0.74% 1.04% 1.02% Average Revenue per User $ $ $ $ $ $ $ $ 71.45

14 Page 14 Income Statement (In Millions) Fiscal Years Ending Dec. 31 Dec '11 Dec '12 Dec '13 Dec '14E Dec '15E Dec '16E Dec '17E Dec '18E Sales 110, , , , , , , ,047 COGS excluding D&A 45,875 46,235 44,887 47,606 48,998 50,133 51,206 52,078 Depreciation 14,991 14,920 15,019 16,012 16,145 16,299 16,425 16,619 Amortization of Intangibles 1,505 1,540 1,587 1,631 1,666 1,709 1,724 1,742 SG&A Expense 29,670 32,145 27,089 32,572 33,525 34,302 35,036 35,632 Operating Income 18,834 21,006 31,968 27,457 28,608 29,487 30,363 30,976 Equity in earnings of Unconsolidated Businesses Non-operating Income (Expense) - Net Interest Expense 2,827 2,571 2,667 4,689 5,034 4,783 4,543 4,316 Unusual Expense (Income) - Net 5,954 8,946-6, Pretax Income 10,483 9,897 29,277 22,658 23,460 24,587 25,698 26,536 Income Tax Provision ,730 7,799 8,075 8,463 8,845 9,134 Consolidated Net Income 10,198 10,557 23,547 14,859 15,385 16,124 16,853 17,402 Minority Interest Expense 7,794 9,682 12, Net Income 2, ,497 14,859 15,385 16,124 16,853 17,402 EPS # of Shares Outstanding (millions) 2,833 2,853 2,866 4,143 4,139 4,135 4,129 4,123 Dividends/Share

15 Page 15 Balance Sheet (In Millions) Fiscal Years Ending Dec. 31 Dec '11 Dec '12 Dec '13 Dec '14E Dec '15E Dec '16E Dec '17E Dec '18E Assets Cash Only 13,362 3,093 53, ,265 1,715 2,900 Total Short Term Investments Accounts Receivables, Gross 12,578 13,217 13,084 13,655 14,055 14,380 14,688 14,938 Bad Debt/Doubtful Accounts Accounts Receivables, Net 11,776 12,576 12,439 12,973 13,352 13,661 13,954 14,191 Inventories 940 1,075 1,020 1,253 1,289 1,319 1,348 1,370 Other Current Assets 4,223 3,999 3,406 4,234 4,358 4,459 4,555 4,632 Total Current Assets 30,939 21,235 70,994 19,534 20,384 21,352 22,231 23,765 Property, Plant & Equipment - Gross 215, , , , , , , ,615 Accumulated Depreciation 127, , , , , , , ,408 Net Property, Plant & Equipment 88,434 88,642 88,956 89,694 90,549 91,250 92,325 93,207 Investments in Unconsolidated Businesses 3,448 3,401 3,432 3,415 3,398 3,381 3,364 3,347 Long-Term Note Receivable 1,864 1, Net Goodwill 23,357 24,139 24,634 93,587 93,587 93,587 93,587 93,587 Net Other Intangibles 79,128 83,677 81,547 83,323 85,441 86,179 87,118 88,242 Other Assets 3,291 2,673 4,535 2,293 2,360 2,414 2,466 2,508 Total Assets 230, , , , , , , ,655 Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt 4,849 4,369 3,933 3,156 3,301 3,222 3,293 3,636 Accounts Payable 14,689 16,182 16,453 16,913 17,407 17,811 18,192 18,501 Income Tax Payable Other Current Liabilities 11,223 6,405 6,664 6,803 7,002 7,164 7,317 7,442 Total Current Liabilities 30,761 26,956 27,050 26,871 27,710 28,197 28,802 29,579 Long-Term Debt 50,303 47,618 89,658 96,258 91,445 86,873 82,529 78,403 Employee Benefit Obligations 32,957 34,346 27,682 27,959 28,238 28,521 28,806 29,094 Deferred Tax Liabilities 25,060 24,677 28,639 29,268 30,677 30,336 29,684 29,037 Other Liabilities 5,472 6,092 5,653 6,928 7,131 7,296 7,452 7,579 Total Liabilities 144, , , , , , , ,692 Common Stock 39,793 40,962 38,236 98,269 98,269 98,269 98,269 98,269 Retained Earnings 1,179-3,734 1,782 7,731 13,955 20,662 27,839 35,300 Accumulated Other Comprehensive Income 1,269 2,235 2,358 2,358 2,358 2,358 2,358 2,358 Deferred Compensation Treasury Stock -5,002-4,071-3,961-4,199-4,451-4,718-5,001-5,301 Total Shareholders' Equity 35,970 33,157 38, , , , , ,963 Accumulated Minority Interest 49,938 52,376 56, Total Equity 85,908 85,533 95, , , , , ,963 Liabilities & Shareholders' Equity 230, , , , , , , ,655

16 Page 16 Cash Flow Statement (In Millions) Fiscal Years Ending Dec. 31 Dec '11 Dec '12 Dec '13 Operating Activities Net Income / Starting Line 10,198 10,557 23,547 Depreciation and Depletion 14,991 14,920 15,019 Amortization of Intangible Assets 1,505 1,540 1,587 Deferred Taxes & Investment Tax Credit ,785 Other Funds 5,588 5,824-7,115 Funds from Operations 32,059 31,889 38,823 Extra ordinaries Changes in Working Capital -2, Receivables , Inventories Accounts Payable -1,607 1, Other Assets/Liabilities Net Operating Cash Flow 29,780 31,486 38,818 Investing Activities Capital Expenditures -16,244-20,110-17,184 Net Assets from Acquisitions Sale of Fixed Assets & Businesses Purchase of Investments 2, Sale/Maturity of Investments Other Sources ,782 Net Investing Cash Flow -17,250-20,502-14,833 Financing Activities Cash Dividends Paid -5,555-5,230-5,936 Change in Capital Stock Repurchase of Common & Preferred Stk Sale of Common & Preferred Stock Issuance/Reduction of Debt, Net 1,183-3,351 40,861 Change in Current Debt 1,928-1, Change in Long-Term Debt ,914 41,003 Issuance of Long-Term Debt 11,060 4,489 49,166 Reduction in Long-Term Debt -11,805-6,403-8,163 Other Funds -1,705-12,987-8,407 Other Uses -1,705-12,987-8,407 Other Sources Net Financing Cash Flow -5,836-21,253 26,450 Miscellaneous Funds Net Change in Cash 6,694-10,269 50,435 Free Cash Flow 13,536 15,311 22,214 Beginning Cash 6,684 13,378 3,109 Ending Cash 13,378 3,109 53,544

17 Projected Cash Flows (In Millions) Page 17 Fiscal Years Ending Dec. 31 Dec '14E Dec '15E Dec '16E Dec '17E Dec '18E Cash Flow From Operating Activities Net Income 14,859 15,385 16,124 16,853 17,402 Adjustments to reconcile net income to net cash Provided by operating activities Depreciation 16,012 16,145 16,299 16,425 16,619 Amortization 1,631 1,666 1,709 1,724 1,742 Change in deferred taxes 629 1,409 (341) (652) (647) Changes in working capital Accounts Receivable (534) (379) (309) (292) (237) Inventories (233) (37) (30) (28) (23) Other Current Assets (828) (124) (101) (95) (78) Change in current liabilities Debt Maturing in one year (777) 145 (79) Accounts Payable Other Current Liabilities Net cash provided by operating activities 31,357 34,904 33,837 34,538 35,555 Cash flows from investing activities Capital Expenditures (16,750) (17,000) (17,000) (17,500) (17,500) Change in Short-term investments (13) (18) (15) (14) (11) Investments in unconsolidated businesses Goodwill (68,953) Long Term Note Receivable Other intangible assets (3,407) (3,784) (2,447) (2,663) (2,866) Other assets 2,242 (67) (55) (52) (42) Net cash used for investing activities (86,863) (20,852) (19,499) (20,212) (20,402) Cash flows from financing activities Long term debt 6,600 (4,813) (4,572) (4,344) (4,126) Employee benefit obligations Other Liabilities 1, Dividends Paid in Cash (8,911) (9,160) (9,417) (9,676) (9,942) Common Stock 60, Treasury Stock (238) (252) (267) (283) (300) Change in deferred compensation (18) (17) (17) (16) (15) Non-controlling interest (56,580) Net cash provided by Financing Activities 2,438 (13,760) (13,825) (13,877) (13,969) Beginning Cash 53, ,265 1,715 Change in cash position (53,067) ,185 Ending Cash ,265 1,715 2,900

18 Page 18 Common Size Income Statement Fiscal Years Ending Dec. 31 Dec '11 Dec '12 Dec '13 Dec '14E Dec '15E Dec '16E Dec '17E Dec '18E Sales % % % % % % % % COGS excluding D&A 41.38% 39.91% 37.24% 38.00% 38.00% 38.00% 38.00% 38.00% Depreciation 13.52% 12.88% 12.46% 12.78% 12.52% 12.35% 12.19% 12.13% Amortization of Intangibles 1.36% 1.33% 1.32% 1.30% 1.29% 1.30% 1.28% 1.27% SG&A Expense 26.76% 27.75% 22.47% 26.00% 26.00% 26.00% 26.00% 26.00% EBIT (Operating Income) 16.99% 18.13% 26.52% 21.92% 22.19% 22.35% 22.53% 22.60% Non-operating Income (Expense) - Net 0.39% 0.35% -0.02% 0.00% 0.00% 0.00% 0.00% 0.00% Interest Capitalized 2.55% 2.22% 2.21% 3.74% 3.90% 3.63% 3.37% 3.15% Pretax Income 9.45% 8.54% 24.29% 18.09% 18.19% 18.64% 19.07% 19.36% Income Tax Provision 0.26% -0.57% 4.75% 6.23% 6.26% 6.41% 6.56% 6.66% Equity in Earnings of Affiliates 0.40% 0.28% 0.12% 0.09% 0.09% 0.09% 0.09% 0.09% Consolidated Net Income 9.20% 9.11% 19.53% 11.86% 11.93% 12.22% 12.51% 12.70% Minority Interest Expense 7.03% 8.36% 10.00% 0.00% 0.00% 0.00% 0.00% 0.00% Net Income 2.17% 0.76% 9.54% 11.86% 11.93% 12.22% 12.51% 12.70%

19 Page 19 Common Size Balance Sheet Fiscal Years Ending Dec. 31 Dec '11 Dec '12 Dec '13 Dec '14E Dec '15E Dec '16E Dec '17E Dec '18E Assets Cash Only 2.67% 44.40% 44.40% 0.37% 0.58% 0.96% 1.27% 2.12% Total Short Term Investments 0.41% 0.50% 0.50% 0.49% 0.49% 0.49% 0.49% 0.49% Accounts Receivables, Net 10.86% 10.32% 10.32% 10.36% 10.36% 10.36% 10.36% 10.36% Accounts Receivables, Gross 11.41% 10.32% 10.85% 10.90% 10.90% 10.90% 10.90% 10.90% Bad Debt/Doubtful Accounts -0.55% 0.00% -0.54% -0.55% -0.55% -0.55% -0.55% -0.55% Inventories 0.93% 0.85% 0.85% 1.00% 1.00% 1.00% 1.00% 1.00% Other Current Assets 3.45% 2.83% 2.83% 3.38% 3.38% 3.38% 3.38% 3.38% Total Current Assets 18.33% 58.89% 58.89% 15.59% 15.81% 16.18% 16.50% 17.34% Net Property, Plant & Equipment 76.52% 73.79% 73.79% 71.60% 70.22% 69.17% 68.51% 68.01% Total Investments and Advances 2.94% 2.85% 2.85% 2.73% 2.64% 2.56% 2.50% 2.44% Long-Term Note Receivable 1.26% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Net Goodwill 20.84% 20.43% 20.43% 74.70% 72.58% 70.94% 69.45% 68.29% Net Other Intangibles 72.23% 67.65% 67.65% 66.51% 66.26% 65.32% 64.65% 64.39% Other Assets 2.31% 3.76% 3.76% 1.83% 1.83% 1.83% 1.83% 1.83% Total Assets % % % % % % % % Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt 3.77% 3.26% 3.26% 2.52% 2.56% 2.44% 2.44% 2.65% Accounts Payable 4.09% 13.65% 13.65% 13.50% 13.50% 13.50% 13.50% 13.50% Miscellaneous Current Liabilities 9.79% 5.53% 5.53% 5.43% 5.43% 5.43% 5.43% 5.43% Total Current Liabilities 23.27% 22.44% 22.44% 21.45% 21.49% 21.37% 21.37% 21.58% Long-Term Debt 41.10% 74.37% 74.37% 76.84% 70.92% 65.85% 61.24% 57.21% Employee Benefit Obligations 29.65% 22.96% 22.96% 22.32% 21.90% 21.62% 21.38% 21.23% Deferred Tax Liabilities 21.30% 23.76% 23.76% 23.36% 23.79% 22.99% 22.03% 21.19% Other Liabilities 5.26% 4.69% 4.69% 5.53% 5.53% 5.53% 5.53% 5.53% Total Liabilities % % % % % % % % Common Stock Par/Carry Value 0.26% 0.25% 31.72% 78.44% 76.21% 74.49% 72.92% 71.70% Retained Earnings -3.22% 1.48% 1.48% 6.17% 10.82% 15.66% 20.66% 25.76% Treasury Stock -3.51% -3.29% -3.29% -3.35% -3.45% -3.58% -3.71% -3.87% Total Shareholders' Equity 28.62% 32.22% 32.22% 83.46% 85.71% 88.64% 91.88% 95.56% Accumulated Minority Interest 45.21% 46.93% 46.93% 0.00% 0.00% 0.00% 0.00% 0.00% Total Equity 73.83% 79.15% 79.15% 83.46% 85.71% 88.64% 91.88% 95.56% Liabilities & Shareholders' Equity % % % % % % % %

20 Page 20 Weighted Average Cost of Capital (WACC) Estimation 2014 Cost of Equity (CAPM) Risk Free Rate 3.52% Average Beta 0.64 Equity Risk Premium 5.15% Cost of Equity 6.81% Pre tax Cost of Debt 5.23% Marginal Tax Rate 34.42% After tax Cost of Debt 3.43% Market Value of Equity 199,376 Market Value of Debt 109,554 Total 308,930 Weight of Debt 35.46% Weight of Equity 64.54% WACC 5.61%