Telecom Sector Presentation.pptx - Fisher College of … Sector... · Buyer Power (Moderate) - Despite ... buyers have low switching costs due to no-contract plans. Supplier Power

Telecommunications Sector

Pravin Talreja

Agenda 1.  Sector Overview 2.  Business Analysis 3.  Economic Analysis 4.  Financial Analysis 5.  Valuation Analysis 6.  Recommendation


Sector Size: S&P 500 and SIM •  Total Telecommunication Sector Market Cap: $1.8 trillion •  S5TELS Market Cap: $416.4 billion = 2.27% of S&P 500 •  The only telecom holding: VZ @ $279.7 thousand = 2.88% of

SIM – overweight by 0.61%

Consumer Discretionary,

12.80%

Consumer Staples, 9.43%

Energy, 7.78%

Financials, 16.63% Health Care,

15.42%

Industrials, 10.09%

Information Technology,

19.63%

Materials, 3.13%

Telecommunication Services,

2.27% Utilities, 2.82%

S&P 500 Consumer

Discretionary, 12.61%

Consumer Staples, 8.39%

Energy, 7.37% Financials,

17.76%

Health Care, 16.16%

Industrials, 9.41%

Information Technology,

20.79%

Materials, 2.25%

Telecommunication Services,

2.88% Utilities, 3.00%

SIM

Telecommunication Industries •  Diversified Telecommunication Services

•  Wireless Telecommunication Services

1 – Canadian companies with common stock, not part of S&P 500 2 – American company with common stock, not part of S&P 500

QTD and YTD Performance QTD S5TELS vs. S&P 500 YTD S5TELS vs. S&P 500


Telecom Industry Dynamics

Industry Life Cycle

•  Wireline: –  Segment in decline stage with

revenue falling YOY –  Commoditized product –  Wireless substitution

•  Wireless: –  Segment in mature stage with

revenue increasing, but at a slower pace

–  Differentiation based on network dependability

–  Disruptive price competition –  Internet Of Things could prove

to be a catalyst

Wireless

Wireline

Business Cycle

•  Information Technology, Consumer Discretionary, and Healthcare doing well

•  Interest rates are set to go

higher, but the increase may be moderated given timid inflation levels and GDP growth

Business Cycle (cont.)

•  Currently in mid to late stage

of the business cycle

•  Not a typical business cycle given extremely low interest rates, combined with controlled inflation and a still-delicate economy

Correlation to S&P 500

•  Second lowest correlation among the S&P 500 sectors:

•  0.600

•  Beta: 0.777

Geography and Users •  The White House administration confirmed that 98% of all Americans have LTE coverage (confirming Verizon’s claim)

•  Wireless penetration at 110% - 355.4 million subscriber connections

–  ARPA becoming less relevant as a measure as more subscribers have multiple devices connected

•  44% of US households are now wireless only

Industry Trends •  Internet Of Things: Wireless M2M connections projected to increase

from 36 million in 2013 to 263 million by 2018 (Cisco)

•  Vertical Integration: The sector is experiencing a wave of consolidations that puts content and distribution under one roof:

–  Verizon and AOL –  AT&T and DirectTV –  Rumored:

•  DISH and T-Mobile •  T-Mobile and Sprint

•  Mobile Data to Double: Mobile Data is expected to double by 2018 leading to high demands and pricing on scarce spectrum bandwidths.

Porter’s Five Forces

Buyer Power (Moderate) - Despite moderately differentiated product, buyers have low switching costs due to no-contract plans.

Supplier Power (Moderate) - Many manufacturers of equipment - FCC regulates Spectrum availability

Barriers to Entry (High) - Few large players that dominate this industry - Highly contested mature industry - Capital intensive

Threat of Substitution (High) - VoIP services proving to be the biggest threat - Disruptive innovation through consolidation of technology and telecom sectors

Competition and Rivalry (High)

- Intense rivalry involving price


Interest Rate

•  Correlation with 10-yr US Generic Govt. Yield: -0.0785

•  10-year treasury on the rise – reduces the attractiveness of telecom industry

Interest Rate (cont.)

•  Latest FOMC consensus is for a rate hike in September

•  The new mid-point of ~ 70 basis points is lower than their March mid-point of ~ 90 basis points due to economic recovery conerns


Sales Growth: Sector vs. S&P 500

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Sales Growth % S5TELS vs. S&P 500

S&P 500

S5TELS

•  Mature Sector - Three consecutive years of sales decline •  S&P has better sales growth since the financial crises –

business cycle impact

Sales Growth: Key Firms (VZ & T)

•  Verizon has recorded marginally better sales growth rates than AT&T since 2011

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

'06 '07 '08 '09 '10 '11 '12 '13 '14 TTM

Sales Growth % Key Firms

VZ

T

Gross Margin: Sector vs. S&P 500

•  Telecom sector has significantly higher gross margins than S&P 500 •  Verizon is highest in terms of Gross Margin % within the sector

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Gross Margin % S5TELS vs. S&P 500

S&P 500

S5TELS

Profit Margin: Sector vs. S&P 500

•  S&P 500 has recorded better bottom-line figures than Telecom in most years

•  Telecom is capital intensive with high depreciation

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Profit Margin % S5TELS vs. S&P 500

S&P 500

S5TELS

ROE: Sector vs. S&P 500

•  Telecom has had lower ROE than S&P 500 in most years

-5

0

5

10

15

20

25

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

ROE S5TELS vs. S&P 500

S&P 500

S5TELS

Leverage D/E: Sector vs. S&P 500

•  Capital intensive industry that took advantage of cheap funding •  Increased spending on Spectrum •  Portion of 2014 increase can be attributed to VZ acquiring 45%

Vodafone stake

0

50

100

150

200

250

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Leverage (D/E) S5TELS vs. S&P 500

S&P 500

S5TELS


Multiples: Absolute & Relative S&P 500

•  Absolute: Most dials look expense, except for P/E •  Relative to S&P 500: Valuations appear cheaper

P/E and P/S: Sector vs. S&P 500

0

5

10

15

20

25

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

P/E S5TELS vs. S&P 500

S&P 500

S5TELS

0 0.2 0.4 0.6 0.8

1 1.2 1.4 1.6 1.8

2

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

P/S S5TELS vs. S&P 500

S&P 500

S5TELS

P/B and P/CF: Sector vs. S&P 500

0

0.5

1

1.5

2

2.5

3

3.5

4

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

P/B S5TELS vs. S&P 500

S&P 500

S5TELS

0 2 4 6 8

10 12 14 16 18 20

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

P/CF S5TELS vs. S&P 500

S&P 500

S5TELS


Recommendation SIM weight equal to S&P 500

Reduce SIM weight by 0.61% to 2.27%

•  IoT provides an exciting opportunity for market expansion •  Stable dividends provide support for prices, given modest economic

recovery •  FOMC takes a delicate stance on interest rate hikes

Risks •  Highly contested market; aggressive tactics by competitors •  High leverage could impose strain on cash available for capital

expenditures (especially coupled with increasing interest rates)

Questions?

Documents

Telecom Sector Presentation.pptx - Fisher College of … Sector... · Buyer Power (Moderate) - Despite ... buyers have low switching costs due to no-contract plans. Supplier Power