TELECOMMUNICATIONS SECTOR ANALYSIS · PDF fileTELECOMMUNICATIONS SECTOR ANALYSIS Ankita...
Transcript of TELECOMMUNICATIONS SECTOR ANALYSIS · PDF fileTELECOMMUNICATIONS SECTOR ANALYSIS Ankita...
TELECOMMUNICATIONS SECTOR ANALYSIS
Ankita Agarwal
Jackie Gleason
Jason Stegall
Sector Overview
Analysis
• Business Analysis
• Economic Analysis
• Financial Analysis
• Valuation Analysis
Recommendation
AGENDA
Sector Overview
Weights
Name S&PPercentage Market Over/Under
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%
SIM Portfolio
Financials
Telcom
Information Technology
Consumer Discretionary
Consumer Staples
TELECO
MPortfolio
Industries
Integrated Telecommunication 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.
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.
Largest Companies
Wireless Telecomm. Services
TELECO
MIntegrated Telecomm. Services
• AT&T
• Verizon Communications
• Chunghwa Telecom Co. Ltd
• BCE
• NII Holdings
• American Tower Corporation
• SBA Communications
• Vodafone
• Telefonica
• Bharti Airtel Limited
TELECO
MCurrent 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
TELECO
MLifecycle
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.
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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.
TELECO
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TELECO
MFive Forces Analysis
Competition within the Industry
(High)
Barriers to Entry
(High)
Buyer Power
(Moderate)
Substitutes
(Moderate)
Supplier Power
(Low)
The sector is very capital intensive and entry is governed by the FCC
Buyers are the end use customers and have moderate power
Suppliers are varied with none holding key technology
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
ECONOMIC ANALYSIS
TELECO
MGDP 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
TELECO
MBusiness 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
TELECO
MConsumer 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.
TELECO
M10-Year Treasury Yield vs. Telecom
The r-value reflects some influence of treasury rates on this capital intensive industry.
FINANCIAL ANALYSIS
TELECO
MEstimated Changes
TELECO
MEstimated Changes
TELECO
MFuture Earnings Outlook
Earnings Surprise
Earnings Surprise
SBAC
AMT
NIHD
Dividend Yield
Dividend Yield
EBITDA, Nat Profit Margin and ROE
TELECO
MTelecom ROE Outlook
Return on Equity
Return on Equity relative to S&P500
VALUATION ANALYSIS
TELECO
MTelecom Sector Valuation Ratios
High Low Median CurrentTrailing 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
TELECO
MTelecom Sector Valuation Ratios vs. S&P 500
High Low Median CurrentTrailing 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
TELECO
MIntegrated Telecom Industry Valuation Ratios
High Low Median CurrentTrailing 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
TELECO
MIntegrated Telecom Industry Valuation Ratios vs. S&P 500
High Low Median CurrentTrailing 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
TELECO
MWireless Telecom Industry Valuation Ratios
High Low Median CurrentTrailing 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
TELECO
MWireless Telecom Industry Valuation Ratios vs. S&P 500
High Low Median CurrentTrailing 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
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Reasons We Like TelcomT
ELECOM
•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.
QUESTIONS?