Telecommunications  Sector  Presentation  

By  Brad  Moore  

Sector  Overview  

The  Telecommunications  Services  Sector  contains  companies  that  provide  communications  services  primarily  through  a  fixed-­‐line,  cellular,  wireless,  high  bandwidth  and/or  fiber  optic  cable  network.  

Percent  of  S&P  500  

12.07%  

9.67%  

10.29%  

16.43%  

13.31%  

10.73%  

18.41%  

3.52%  

 Telecommunica+on  Services  ,  2.49%   3.08%  

 Consumer  Discre9onary    

 Consumer  Staples    

 Energy    

 Financials    

 Health  Care    

 Industrials    

 Informa9on  Technology    

 Materials    

 Telecommunica9on  Services    

 U9li9es    

                                   As  of  5/30/2014  

•  Diversified  Telecommunication  Services    •  “Wireline”  services  •  Use  broadband  or  fiber  optic  cable  to  transmit  data  

•  Wireless  Telecommunication  Services  •  Provide  cellular  or  wireless  services  

Industries  

Companies  

Market  Cap  by  Company  

Company   Market  Cap  

AT&T  Inc   184,686,934,030    

CenturyLink  Inc   21,771,564,850    

Fron9er  Communica9ons  Corp   5,787,377,130    

Verizon  Communica9ons  Inc   206,891,404,360    

Windstream  Holdings  Inc   5,703,758,280    

Total  424,841,038,650    

Sector  Performance  -­‐  YTD  

Sector  Performance  -­‐  QTD  

Rivalry  •  Very  Concentrated  

•  Few  Large  Players  

•  Competing  for  limited  resources  

•  High  Rivalry  

Barriers  to  Entry  •  High  Capital  Costs  

•  Must  Build  Network  

•  High  Barriers  to  Entry    

Threat  of  Substitute  •  Huge  Shift  from  Landline  to  Wireless  

•  Future  of  Television  

•  Smartphones  Here  to  Stay  

•  Low  Threat  of  Substitutes  

Supplier  Power  •  Limited  Spectrum  Available  

•  Highly  Regualted  by  FCC  

•  Leading  to  Acquisitions/Mergers  

•  High  Supplier  Power  

Buyer  Power  •  Unconcentrated  Buyers  

•  Long-­‐Term  Contracts  

•  High  Switching  Costs  

•  Low  Buyer  Power  

Porter’s  Five  Forces  

Financial  Analysis  

    2008   2009   2010   2011   2012   2013   2014   2015   2016   Trend  

Sales   108.54   111.94   113.63   116.42   117.15   114.53   118.47   121.1   122.31   Increasing  

Sales  Growth       3.13%   1.51%   2.46%   0.63%   -­‐2.24%   3.44%   2.22%   1.00%   Decreasing  

Gross  Margin  %   59.9%   58.21%   57.58%   56.36%   56.64%   61.59%   59.95%   60.11%   64.49%   Increasing  

Oper  Margin  %   16.0%   14.30%   13.76%   9.96%   9.77%   24.19%   24.51%           Increasing  

Profit  Margin  %   6.7%   5.75%   6.98%   1.53%   1.73%   10.64%   11.26%           Increasing  

•  Wireline  sales  are  decreasing  year  over  year  •  Smartphones  account  for  70%  of  all  subscribers  and  85%  of  new  sales  

•  Future  Growth  –  From  Fidelity  •  Usage-­‐Based  Pricing  •  Connected  Devices  

Sales  and  Sales  Growth  

    2008   2009   2010   2011   2012   2013   2014   2015   2016   Trend  

Sales   108.54   111.94   113.63   116.42   117.15   114.53   118.47   121.1   122.31   Increasing  

Sales  Growth       3.13%   1.51%   2.46%   0.63%   -­‐2.24%   3.44%   2.22%   1.00%   Decreasing  

•  Adding  more  devices  to  their  plan  –  higher  margin  

•  Smartphone  vs.  Basic  Cell  Phone  

•  Change  in  GAAP  revenue  recognition  

Margins  

    2008   2009   2010   2011   2012   2013   2014   2015   2016   Trend  

Gross  Margin  %   59.9%   58.21%   57.58%   56.36%   56.64%   61.59%   59.95%   60.11%   64.49%   Increasing  

Oper  Margin  %   16.0%   14.30%   13.76%   9.96%   9.77%   24.19%   24.51%           Increasing  

Profit  Margin  %   6.7%   5.75%   6.98%   1.53%   1.73%   10.64%   11.26%           Increasing  

Price  to  Earnings  –  S&P  vs  Tele  

Telecom   S&P  500  

Price  to  Sales  –  S&P  vs  Tele  

Telecom   S&P  500  

Price  to  Book  –  S&P  vs  Tele  

Telecom   S&P  500  

•  Difficulty  using  valuation  methods  on  multi-­‐industry  businesses  

•  Example  AT&T/DirecTV  

•  Creates  riskiness  of  cash  flows  –  increase  in  discount  rate  

•  How  realistic  are  synergies?  

•  Negative  impacts  of  transaction  

•  Google  acquisition  of  wireless  start  up  

Affect  of  Mergers/Acquisitions  

•  Currently,  overweight  in  Telecommunications  (2.84%  vs.  2.49%  

of  S&P)  

•  Should  move  to  be  underweight  

•  No  diversification  within  Telecommunications  (AT&T  only)  

•  Spread  investment  over  multiple  companies  that  look  appealing  

•  Be  ready  for  a  rebound  in  this  sector  

Recommendation