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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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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
Portfolios and Composition
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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
Portfolios and Composition
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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?