(us) sector telecom

8/14/2019 (US) Sector Telecom

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January 4, 2009 1

TelecommunicationsSector

Kevin Ratliff

Nitin SharmaFebruary 2008

SIM


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January 4, 2009 2

Overview

Portfolios and Composition

Economic Analysis

Business Analysis

Financial Analysis

Valuation Analysis

Recommendations


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S&P 500 Sector Weightages

Energy, 12.3%

Materials, 3.4%

Consumer Staples,

10.3%Health Care, 12.1%

Financials, 18.6%

Information

Technology, 15.6%

Telecom 3.5%Utilities, 3.6%

Industrials, 11.7%

Consumer

Discretionary, 8.8%

Size and Composition - WeightsSIM Portfolio - Sector Weightages

Cons Discr, 8.92%

Con Staples, 9.85%

Energy, 8.49%

Utilities, 2.32%

Info Tech, 18.62%Industrials, 10.59%

Materials, 4.54%

Health Care, 16.12%

Telecom, 3.78%

Financials, 16.78%

SIM portfolio slightly overweight in Telecom compared to the current S&P500weights3.5% in S&P versus 3.78% in SIMOnly telecom stock present in SIM portfolio is America Movil (AMX)

S&P and SIM Portfolios



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Diversified Telecom Services Alternate carriers

Providers of communications and high-density data transmission servicesprimarily through a high bandwidth/fiber-optic cable network.

Embarq, Citizen Communications

Integrated Telecommunications Services Operators of primarily fixed-line telecommunications networks and

companies providing both wireless and fixed-line telecommunicationsservices.

Verizon, AT&T

Wireless Communication Services Providers of primarily cellular or wireless telecommunication services, including

paging services. Sprint-Nextel, NII Holdings

Composition - Industries



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Economic Analysis - Overview Domestic

US telecom market saw an increase of 11% revenue growth to $1025Billion in 2007. Consolidation is the current mantra.

Major drivers of high growth have been wireless communication and

broadband access. 80% households in US are already ONLINE Wireline is losing ground to wireless and VoIP Growth has slowed down in 2007 and is expected to remain muted

given the current economic scenario

International International market grew by over 12% to $1.3 Trillion with fastest

growth seen in the EMEA By 2010, the global market is expected to reach $4.3 Trillion, up from

$3 Trillion in 2006 India added a whopping 66.4M mobile subscribers in 2007, a growth

of 62% from 2006. Penetration (Tele-density) still remains a meager23%

Economic Analysis


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Economic Analysis - Factors Demand

GDP growth (+) Population growth

especially growth inmiddle class of developingnations (+)

Unemployment rate (-) Personal Income (+)

Economic Analysis

Supply Energy Prices increase

cost of operations (-)

Commodity Prices increase price of inputs (-) Foreign Exchange Rates

reduces profits frominternational operation(+/-)

Inflation increase inputcosts (commodities, labor,raw materials) (-)


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Economic AnalysisVariation of Telecom Index price with Fed funds rate and GDP growth

Economic Analysis


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High barriers to entry

Dominated by large, well-established companies

High capital requirements to enter sector

Mature industry with strong brand identities

Difficult to create wide distribution network

High buyer power

Undifferentiated product equates to low switching cost Low Supplier Power

Long-term contracting/agreements common

Low threat of substitution Wireless dominant, no real alternatives High threat of competition

Consumers are price sensitive (despite brand loyalty); undifferentiated products Consolidation

Business Analysis 5 Forces

Business Analysis


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Mature Industry Wireline carriers and Wireless companies Highly concentrated Top 50 companies (out of a total

11,000) hold 90% of the market

Shrinking Margins Intense competition Pricing is key Globalization

International expansion

Outsourcing New technology drives the sector

Business Analysis

Business Analysis


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Financial Analysis -Performance

Mean weighted priced has not shown much appreciation in last 5 yearsRevenue growth is above average but trending down

Financial Analysis


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Financials Income Statement

Financial Analysis

Consistent Negative earningssurprises do not bode well forTelecom stock prices


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Financials Balance Sheet

Financial Analysis

Leverage steady in the 60-70% rangeOverall, balance sheet looks healthy


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Financials Cash Flow Statement

Financial Analysis

Heavy on CAPEX and dividendsCash flows have remained flat or have experienced low growth


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Financials Earnings & Dividends

Financial Analysis

Steady dividend yieldsS&P 500 average is around 2%


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Valuation Analysis - Multiples

Absolute Relative to S&P

Multiple Mean Current Mean Current

P/Forward E 19.1 12.2 0.99 0.94P/S 1.71 1.52 1.1 1.14

P/B 2.5 1.8 0.78 0.71

P/EBITDA 5.9 5.1 0.72 0.82

P/CF 6.4 5.9 0.53 0.64

P/E/G ratio 1.7 1.5 1.35 1.31

ROE 0.13 0.11 0.84 0.63

Consensus growth estimate for Telecom is 9% with a standard deviation of5%.Consensus growth estimate for Market is 12.0% with a standard deviation of4%.

Valuation Analysis


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Valuation Analysis - Multiples

Valuation Analysis


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Valuation Analysis Momentum

Valuation Analysis


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Cyclical sector underperforms S&P when economy ispoor

Mature industry with low growth rate

Within Telecommunications, Wireless industry isexpected to outperform with a CAGR of 10% over thenext few years

Telecom companies are facing cost and marginpressures

Currently inline to slightly expensive when compared toS&P 500

High beta and high PEG ratio for Telecom sector Negative economic outlook GDP growth,

Unemployment and Inflation

Summary

Recommendations


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Telecom Sector should be even-weighted instead of 28Basis Points overweight

Sell 28 basis points to bring the SIM weightingrelative to the S&P500 to 100%

Further underweighting in the future if economicconditions dont improve

Wireless has better growth prospects Look for Telecom companies that have significant

international exposure or for Telecom companies in

countries that have strong domestic growth (ChinaMobile, Vodafone)

Recommendations

Recommendations


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Thank you

What questions do you have?

(us) sector telecom

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