MUNICATIONS SECTOR ANALYSIS Ankita Agarwal Jackie Gleason Jason Stegall
AGENDA Sector Overview Analysis Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation
Sector Overview Portfolio Weights Name S&P Percentage Market Over/Under SIM Portfolio Financials Telcom Information Technology Consumer Discretionary Consumer Staples Financials 15.22% 17.57% 2.35% Telcom 3.20% 3.34% 0.14% Information Technology 17.79% 15.82% (1.97%) Consumer Discretionary 10.65% 9.07% (1.58%) Consumer Staples 10.60% 11.71% 1.11% Energy 12.68% 10.87% (1.81%) Industrials 11.02% 10.11% (0.91%) Healthcare 11.80% 9.85% (1.95%) Materials 3.66% 3.28% (0.38%) Utilities 3.38% 5.97% 2.59% Cash 0.00% 2.40% 2.40% Total 100.00% 100.00%
Industries Integrated Telecommunication Services The Integrated Telecommunications Services industry consists of companies engaged in providing telecommunication services other than wireless. The industry includes integrated providers of both fixed-line and wireless services offering voice, data and high-density data transmission services. Wireless Telecommunication Services The Wireless Telecommunications Services industry consists of companies engaged in providing wireless communication services, such as paging, cell phone and other satellite telecommunication services. The industry excludes cable television services utilizing satellite delivery.
Largest Companies Integrated Telecomm. Services Wireless Telecomm. Services AT&T Verizon Communications Chunghwa Telecom Co. Ltd BCE NII Holdings American Tower Corporation SBA Communications Vodafone Telefonica Bharti Airtel Limited
Current Position Information Current Position:14 Bps Overweight Current Holdings: NII Holdings (NII) Return: $193,536 Prospective Companies: SBA Communications (SBAC) American Tower Corporation (AMT)
BUSINESS ANALYSIS
Lifecycle Traditional Land-lines are mature, however there are horizontal growth opportunities (DSL, UVERSE, etc) Wireless service is still up and coming especially in foreign markets (Like NIHD and AMT) Heavy Capital Expenditure needed to maintain international growth, existence of economies of scale Typically growth follows upgrades to network. Smaller companies can handle upgrades better because they have smaller network.
The user and geography User: Anyone, everyone these days seem to use cell phones, even the Amish. Cell phones connect people without the added cost of physical assets such as copper wiring, substations, even infrastructure in general. Geography: Everywhere in the world Telcom has been on the margin of business since the 1800s. From the telegraph, to the phone, to the modem, to the cable/wireless structure we have today. Telcom is the hare, and as such needs to evolve with the shrinking world.
External Factors Political Headwinds: President Obama s State of the Union address identified a national broadband network as a national goal, and wireless is the future of broadband. Currency Exposure: Most of the businesses in our analysis are U.S. companies that are susceptible to fluctuations in the dollar. Given the current environment this could be mitigated by currency swaps, however, there would be a large transaction cost for this position. This could also be over-come by synthetic portfolios or simply by investing in a variety of countries and balancing based on inflationary pressures.
Five Forces Analysis Suppliers are varied with none holding key technology Supplier Power (Low) Barriers to Entry (High) Competition within the Industry (High) The sector is very capital intensive and entry is governed by the FCC Buyer Power (Moderate) Technology always presents a risk that a new product will change the market The market is starting to mature and companies are competing for market share Substitutes (Moderate) Buyers are the end use customers and have moderate power
ECONOMIC ANALYSIS
GDP vs. Telecom The telecom sector is a defensive sector. Little correlation between sector performance and the GDP
S&P 500 EPS vs. Telecom The telecom sector is a defensive sector. Counter cyclical correlation between sector performance and the EPS of the S&P 500
Business Capital Spending vs. Telecom The high r-value indicates that telecom performance aligns with business investment in capital projects. r-value is very close to that for the Integrated Telecom Service Industry The r-value is much lower for the Wireless Telecom Service Industry
Consumer Spending vs. Telecom While consumer spending influences sector value, it is only moderately correlated. It is important to note that the r-value for the Wireless Telecom Service Industry is 0.70, indicating that consumer spending on wireless devices and services drives industry value.
10-Year Treasury Yield vs. Telecom The r-value reflects some influence of treasury rates on this capital intensive industry.
FINANCIAL ANALYSIS
Estimated Changes
Estimated Changes
Future Earnings Outlook
Earnings Surprise
Earnings Surprise
SBAC AMT NIHD
Dividend Yield
Dividend Yield
EBITDA, Nat Profit Margin and ROE
Telecom ROE Outlook Return on Equity Return on Equity relative to S&P500
VALUATION ANALYSIS
Telecom Sector Valuation Ratios High Low Median Current Trailing P/E 26.7 9.7 16.3 17.8 Forward P/E 32.8 10.5 15.6 16.5 Price to Book 2.7 1.0 1.9 1.8 Price to Sales 2.1 0.9 1.4 1.2 Price to Cash Flow 8.5 3.5 5.4 5.5
Telecom Sector Valuation Ratios vs. S&P 500 High Low Median Current Trailing P/E 1.3 0.68 0.93 1.2 Forward P/E 1.4 0.77 0.96 1.2 Price to Book 1.0 0.4 0.7 0.8 Price to Sales 1.4 0.8 1.0 0.9 Price to Cash Flow 0.7 0.4 0.5 0.6
Integrated Telecom Industry Valuation Ratios High Low Median Current Trailing P/E 2.0 9.1 14.7 14.5 Forward P/E 22.4 9.9 14.3 13.9 Price to Book 3.4 1.0 2.0 1.8 Price to Sales 2.0 1.0 1.4 1.2 Price to Cash Flow 7.6 3.5 5.4 5.2
Integrated Telecom Industry Valuation Ratios vs. S&P 500 High Low Median Current Trailing P/E 1.1 0.58 0.86 1.0 Forward P/E 1.1 0.68 0.89 0.99 Price to Book 1.1 0.4 0.8 0.8 Price to Sales 1.4 0.8 1.0 0.9 Price to Cash Flow 0.6 0.4 0.5 0.5
Wireless Telecom Industry Valuation Ratios High Low Median Current Trailing P/E 175.8 12.0 22.9 NM Forward P/E 286.6 14.6 22.7 NM Price to Book 10.2 0.3 1.4 2.0 Price to Sales 3.0 0.4 1.2 1.1 Price to Cash Flow 33.3 1.6 6.1 8.3
Wireless Telecom Industry Valuation Ratios vs. S&P 500 High Low Median Current Trailing P/E 9.4 0.78 1.40 NM Forward P/E 15.8 0.95 1.50 NM Price to Book 2.7 0.2 0.6 0.9 Price to Sales 1.9 0.5 0.8 0.8 Price to Cash Flow 2.4 0.2 0.6 0.9
RECOMMENDATIONS
Recommendation We recommend an increase to overweight by at least 100 basis points. We believe the integrated market provides a good value play and is underserved by the current portfolio. In addition, existing providers can increase margin by providing additional service options. After longer periods of time, bandwidth will become commoditized and overall return will slow. Areas for expansion: Infrastructure/Newer Technologies (4G, LTE, WiMax, VOIP) Emerging Markets Subscription Based Services
Reasons We Like Telcom Lucrative upside Defensive Fashionable (IPhone) Exposure to information (access to call records, etc. Important and costly information for lawyers). Access to new markets/younger user base. Emerging Technologies Bring everyone closer together.
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