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Mutual Investment Club of Cornell
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Agenda
Announcements Headlines Tech Sector Conviction List Telefonica Pitch
Mutual Investment Club of Cornell
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Buying shares
You are dropped as a junior analyst after today if you still have not invested
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iGo Update
iGo awarded Cisco Flip Video accesories Flip Ultra has 13% camcorder market
Awarded new patents in September Using primary side circuit Individual outlet shut offs
Dual-USB charger Earnings out 10/22
Mutual Investment Club of Cornell
European Worries
Moody lowered Spain’s credit rating AAA---Aa1 Growth expected to lag (1% for several
years and 20% unemployment) Gov’t proposed 7.9% budget cuts and
increased taxes Ireland expected be downgraded again
in Jan Credible cuts vs decreased tax revenue
Anglo Irish Bank Bailout-$46B (total $68B)
Mutual Investment Club of Cornell
Japan
Central bank of Japan push rates to 0% Bought $60B risky assets (corporate
bonds, REITS) Attempt to battle a strong Yen Keep at virtually 0% until ends
deflationary pressures
Expect Fed to engage in quantitate easing Estimated in the area of $1 trillion
Mutual Investment Club of Cornell
Hydraulic Fracturing
“Fracking” – the process in which natural gas is extracted by means of pressure-drilling a mix of water, sand, and chemicals more than a mile vertically and horizontally into the earth (99.5% sand and water, .5% chemical)
Currently used in more than 90% of 450,000 natural gas wells without any incident
Fracking is exempt from the Safe Drinking Water Act, which means it is currently not federally regulated
Debate: Does fracking end up polluting water, thereby harming plants, animals, and humans, during the release of chemicals?
EPA (Environmental Protection Agency) is doing a study to be completed in 2012 that will study the health and environmental effects of fracking
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What This Means for Energy
It is estimated that 60-80% of new wells need fracking to remain viable
Ban on fracking will mean less reserves and higher natural gas prices
Possible step forward for other cleaner and greener technology (wind, solar)
However, because the report will come out in 2012, this will most likely not affect the companies that we currently invest in (something for current freshman and sophomores to look into )
Mutual Investment Club of Cornell
BP New Executive, New Outlook
New CEO Robert Dudley Reorganization of firm’s exploration and
production business into three divisions – exploration, development, and production
Improved Safety Standards – New Safety Division headed by Mark Bly with additional powers to oversee and audit the company’s operations; internal police force
Remains to be seen if the safety procedures will be implemented
Mutual Investment Club of Cornell
BSQUARE - Overview
Expertise in embedded systems Products:
TestQuest Pro: a test automation tool SDIO Hx: integration of peripherals with
smart devices Expertise with hardware and software Major project: Ford’s Synch
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BSQUARE - Financials
Market Cap: $33.5 Million Revenue: $75.5 Million Gross Profit: $13.5 Million Quarterly earnings growth: 1,041.7% Cash per Share: $1.51 Zero Debt
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BSQUARE – Catalyst
Ford (or other automobile maker) could acquire BSQR
BSQR finds another large customer
Mutual Investment Club of Cornell
Verizon Communications (VZ)
US-based communications services provider Broadband, wireless, and wireline services Over 91.2 million business, government, mass market, and
wholesale customers Wireless voice, data services and other value-added services,
voice, internet access, broadband video and data, next generation Internet Protocol (IP) network services, network access, long distance and other services
Price at 10/5/2010, $33.57 (52wk range: 25.99-34.13)
Mutual Investment Club of Cornell
Investment Themes
Net Neutrality: power to the carriers Joint Google + Verizon proposal Mobile ISP internet to not be
covered by guaranteed neutrality Carriers able to discriminate on
what content goes over their network
Potential to charge premium fees for access to premium online services
Tremendous power for cellular carriers to exploit high value users
Verizon, AT&T, etc, to no longer be a ‘dumb pipe’
Significant new revenue stream, the effect of which will be compounded by the continuing rise of mobile internet
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Verizon to win the 4G war First rollout of LTE SIM-based technology Largest, most stable network Highest smartphone data rates End of unlimited data
Rise of Android, CDMA iPhone Android growth Exclusive devices, Droid Series Verizon iPhone in field test stages Forecasted: January 2011 Projected 12m annual sales
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Telefonica S.A. (NYSE: TEF)Samantha Dong
Alex Friedman
Shashank Samala
Ali Yazdi
John Yoshida
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Telecom in Mexico
GDP: $1.09 trilliun; Population: 112 million
Mobile Penetration rate: 43% Currently monopoly economy
Fixed line: 94% by Telmex (AMX) Mobile: 80% by Telcel (AMX)
Growing competition from 3G spectrum auctions Nextel got government wireless license
Mutual Investment Club of Cornell
Telecom in Brazil
GDP: US$ 1.58 Trillion; Population: 192 million Mobile Penetration rate: 90.55%
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PNAD 2008 RI RII RIII Brazil
Income (R$) 704 927 992 820
Pop. (mm) 104.3
44.8 40.8 190.0
Household (mm)
30.4 14.3 12.9 57.6
Mobile + Fixed - %
30 41 58 39
Just Fixed - % 4 4 8 5
Just Mobile - %
42 45 27 39
No phone - % 24 10 7 17
With comp. - %
24 37 47 32
No comp - % 76 63 53 68
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More Opp. in Brazil Market
30%
25%
21%
24%
Number of Subscribers
Vivo/Telefon-icaClaro/AMXOiTIM
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Brazil – Market Trend
Mature local fixed voice Lower traffic per terminal (FMS in traffic)
Continued expansion in mobile market Strong competition Strong market evolution: pre-paid (naked SIM
card) market Broadband growth accelerating
Competition in areas that concentrate high-end clients
3G changing dynamics of industry
Mutual Investment Club of Cornell
AMX Overview
Leading telecom provider Biggest in Mexico, second in Brazil Wireless, Fixed line, broadband, etc.
Pitched Sep 2008 Strong presence in Latin America. Looking for a long term investment: 1-2
years Price Target at end of 1 year: $60 (22.4%
gain)
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Breakdown
Wireless81%
Fixed lines11%
Broadband5%
television3%
259 Million Subscribers
1 As of June 2010
Mexico36%
Brazil 20%Mer-
cosur9%
Andean 16%
Central Amer-ica & Carib-bean 11%
United States 8%
Sales Revenue
Mutual Investment Club of Cornell
Recent News – Integrated Service
Fixed line in Mexico: Telmex Fixed line in Brazil: Telmex Internacional
(Embratel), NETC
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Brazil
Wireless: Claro 26% market share, 46.9 million wireless
subscribers Embratel (TII) – Claro (AMX) Merger
Represent 85% of total synergies: cost reduction
Synergies are offset by premium paid Decreased Revenue forecasts by elimination
of intercompany transaction
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What We Don’t Like
Focus on less attractive markets Mexican Market
Growing competition potential hurts AMX Fixed Line Market
Weaker presence in Brazil wireless market
Stock Valuation
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Company Overview
One of the world’s largest telecommunications companies by market cap. (115.66B)
Activities include fixed and mobile telephony businesses, while its broadband business is the key growth driver underpinning both.
Growth strategy is focused on the markets in which it has a strong foothold: Spain, Europe and Latin America
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Latin American Market
Telefonica Latin America Fixed telephony accesses = 24,514.90 Internet and data accesses = 7,911.50 Mobile accesses = 141,822.20 Pay TV = 1,735.40
Total accesses = 176,102.80
Top Latin American Countries (% of total accesses)
Brazil – 71,353.90 (40.54%) Argentina – 22,396.90 (12.72%) Mexico – 18,687.50 (10.61%)
Mutual Investment Club of Cornell
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European Market
Telefonica Europe Fixed telephony accesses = 3,563.7 Internet and data accesses = 4,382.4 Mobile accesses = 45,217.00 Pay TV = 194.10
Total accesses = 54,541.60
Top Telefonica Europe Countries (% of total accesses)
UK – 22,255.6 (40.80%) Germany – 22,006.90 (40.35%) Czech Republic – 7,672.00 (14.07%)
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Spain Market
Telefonica Spain Fixed telephony accesses = 13,663.90 Internet and data accesses = 5,823.0 Mobile accesses = 23,879,10 Pay TV = 747.80
Total accesses = 47,117.90
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Total Accesses by Market
176102.863%54541.6
20%
47117.917%
Telefonica Latin America Telefonica EuropeTelefonica Spain
* Total Accesses in Thousands
Mutual Investment Club of Cornell
Telefonica/Vivo Deal
Jul 28 – Bought Portugal Telecom’s 60% stake in Vivo, Brazil’s largest wireless company, for EUR 7.5B, adding to its’ 40% stake before the deal
Strengthened position in the booming Brazilian market
EPS and FCF accretive from 2010: +€3.5bn impact in net income in 2010 derived from the business combination achieved in stages in Vivo
€2.3/2.7bn1 from operating synergies and benefits from Telefónica’s management model
Additional €1/1.5bn1 savings from financial and tax synergies (so total of about 4bn saved due to synergies)
Limited Impact on leverage (0.3x)
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Telefonica/Vivo Revenues
First half of 2010: Brazil TEF Revenues – 4.877B EUR, of which 1.825B EUR from Vivo and the rest from Telesp.
Second half of 2010 est. - From the acquisition and assuming 5% growth, expected second half revenues – 7.67B EUR, of which 4.62 B EUR from Vivo.
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Brazil Market Cont.
8.3760000000000136%
14.60764%
Revenues (2009)
Brazil (in Billion EUR)Rest of Latin Amer-ica
12.54744%16.06
56%
Revenues (2010 Es-timated)
Brazil (in Billion EUR)Rest of Latin Amer-ica
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Some stats on Vivo
Vivo reported 56.0 million accesses at the end of June 2010, increasing its customer base by 19.6% year-on-year.
First-half wireless data revenue increased 70.2% year-on-year, 81.5% in the second quarter. Data revenues now account for 17.4% of service revenues (+6.3 percentage points year-on-year)
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Ratio Analysis
TEF AMX Industry
Market Cap: 115.66B 110.04B 5.37BGross Margin (ttm): 59.18% 57.06% 59.18%P/E (ttm): 10.41 15.08 13.3EV/EBITDA 6.02 8.9 n/aP/B 4.19 5.19 n/aCurrent Ratio 0.63 1.6 n/aDividend Yield 6.30% 0.50% n/a Potentially undervalued Liquidity Concern: $70 billion net debt Dividend Yield
Source: Yahoo! Finance
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Valuation: December 2010
Comparable 1P/E 2010E
Vodafone Group PLC 10.9Telefonica 10.2America Movil 13.0
Deutsche Telekom 15.2France Telecom 8.9Average 11.64XEPS 2010E 7.38Price 85.90
Comparable 2
P/S 2010EVodafone Group PLC 1.7Telefonica 1.4America Movil 2.8Deutsche Telekom 0.7France Telecom 0.9Average 1.5XSales/Share 2010E 52.10Price 78.16
Analyst Consensus: 81.60Source: morningstar, yahoo! finance
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Visualization
35%
12%
7%4%2%
41%
1%
Revenue Breakdown by Country
Spain UKGermany Czech RepublicIreland Latin AmericaCorporate and Other
Source: CapitalIQ
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Risk Factors
General European Competition Spain Questions EUR Exposure
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Euro Correlation
Strong Correlation to Euro (EUO is shown-Proshares UltraShort Euro)
Remedies: 1) Options
2) Buy EUO
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Quaneam Analytics
Using 300 days of past data the Z-scores follow:
BollingerBands= 0.88
MACD= 2.14
RSI= 1.78 Aggregating these we get an average Z-score
of: 1.60
0-----------------Median--------------TEF-1 This means that conditional to the past 300
days of data, TEF is at the upper 6% of its evaluation range.
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Quaneam Analytics
Enter trade at $70-71 range to take advantage of suspected correction
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Proposal
Thesis Best position in growing Brazil mobile
market Company focus shift towards Latin America
More attractive valuation than AMX and other competitors
High Dividend Yield
SOLD AMX, BUY 29 shares of TEF with limit $71OPTIONS?