1. Avinash Minhas Vaibhav Meharwade Student Investment Management
Telecom Sector
Avinash Minhas
Vaibhav Meharwade
Student Investment Management

2. Stock Recommendations Stock Analysis - AT&T & Verizon
Agenda
Overview
Telecom Sector
Stock Recommendations
Stock Analysis - AT&T & Verizon
Business Analysis
Financial Analysis
Valuation
Risks to Recommendations
Other Stock Analysis - Sprint
Summary

3. Overview

4. Recap: Telecom Sector Recommendation
Telecom sector has underperformed in comparison to S&P 500: % vs 16.03% YTD.
Demand for future technology (5G, IPTV) is skyrocketing
Telecom companies are heavily investing to meet future demand.
Most telecom companies are trading at low P/E multiple compared to S&P Benchmark.
Recommendation - BUY - Increase Telecom Weight in SIM.

5. SIM Portfolio SIM Portfolio Fisher SIM Telecom Holding:
Verizon only (VZ)
Weight: 1.64% of portfolio
Unit Cost: $49.30; Qty: 3732
Current Market price: $ (07/14)
S&P 500:
S&P Telecom: 2.14%
AT&T %; Verizon %; Level % & Century Link %
SIM Telecom underweight: %
1.64%

6. SIM Portfolio Recommendation
Adjust SIM weight equal to S&P 500 Telecom Index
Increase total SIM weight by +0.50% to 2.14%
BUY
BUY
+25 bps
+25 bps

7. Stock Discussion

8. AT&T Overview Business Telecommunications conglomerate:
integrated communications
entertainment delivery
Services and equipment
Residential and business customers.
Market
AT&T primarily operates in the US market (96% of 2016 Revenues)
Growing internationally:
Mexico and Latin America (4% of 2016 Revenue).

9. AT&T Business Segments

10. Pay-Television Subscribers Internet Broadband Subscribers
AT&T Market Share
Wireless Subscribers
(Q1 2017)
Pay-Television Subscribers
(Dec 2016)
Internet Broadband Subscribers
(Q1 2017)

11. AT&T 3 Months Stock Performance
AT&T stock is currently on decline
YTD= %;
3M = %.
Potential Causes:
Disappointing Q earnings
Losses in legacy business
Competition from OTT services
Uncertainty over Time Warner Merger deal

12. Future TV/ Entertainment: OTT Services
Key Growth Drivers ( )
Future TV/ Entertainment: OTT Services
Mobile TV streaming with AT&T mobile plans
Stream TV channels via DIRECTV NOW
Added 328,000 subscriber in Nov 2016
5G & Internet of Things
Potentially 2nd to launch 5G (10 Gb speed) in 2019
Partnership with automobile companies and new ventures to integrate wireless internet services

13. High Probability that deal will happen:
Time Warner Deal
AT&T announced in Oct 2016 to acquire Time Warner for $85.4B (50% Cash; 50% Stock)
High Probability that deal will happen:
1)Time Warner shareholders approved in Feb 2017; 2)Vertical Integration: no involvement of FCC; 3) Precedence: Comcast & NBC Merger; 4) White House’s anti-regulations stance.
Deal under DOJ review; DOJ’s nominee, Makan Delrahim, previously has not indicated anti-trust issues

14. Time Warner Deal - Financial Projections (Deal/ No Deal)
Debt Load
Sales and Cash Flow
Sales
+17%
Debt
+50%
EPS
Projected Growth Scenarios
EPS
+16%
ROE
+2.4%
Source: Morningstar – Independent Investment Research; Nov 2016

15. Financial Analysis

16. AT&T Valuation Multiples
Ratio Analysis
AT&T Valuation Multiples
AT&T Relative to S&P 500
Source: Bloomberg as of June 2, 2017

17. Financial Analysis
Projected 2017 Revenue: -2.80%

18. Financial Analysis

19. Sensitivity Analysis

20. Risks to Recommendations
Sluggish growth of DIRECTV NOW subscriptions: Lost 3000 subscriptions in Feb; flat growth in March
Delays in 5G implementation: Lost bid to Verizon to acquire Straight Path Communications Inc
Time Warner Deal Cancellation: Growing opposition from Senate Democrats and other organization due to concerns of media power concentration; President Trump has criticized this deal during his election campaign
Increased Debt: Post Time-Warner acquisition debt > $170B (most levered); Downgrade of Moody’s credit ratings.

21. Stock Discussion

22. Verizon Overview
Company Overview: Verizon Communications Inc. is a globally leading provider of communications, information and entertainment services to private consumers, business and governmental entities. Verizon operates through two reportable segments, Wireless and Wireline.
As of December 31, 2016, Verizon Wireless had million retail connections. Through recent business purchases they have combined Yahoo! Inc with AOL Inc. to create a new subsidiary, Oath Inc. The Oath portfolio includes HuffPost, Yahoo Sports, AOL.com, MAKERS, Tumblr, BUILD Studios, Yahoo Finance and Yahoo Mail.
Source: Verizon 10K, Google Finance, Bloomberg

23. Verizon Business Segments
Verizon is heavily dependant on their wireless segment for income.
Their challenge is to maintain market leadership in subscriber base.
Price competition is the primary source for lower margins and therefore lower performance for the telecom sector.
Verizon Communications Inc. Gross Margins by Segment
Source: Verizon 10K FY2016, Author’s Analysis

24. Share Of Wireless Subscriptions U.S.
Verizon Market Share
Share Of Wireless Subscriptions U.S.
Verizon is currently the market leader in share of subscriber base.
Since 2011 both Verizon and AT&T have accounted for the vast majority of subscribers in the market.
Source: Statista 2017

25. Projected Smartphone User Population U.S.
Key Business Drivers
Projected Smartphone User Population U.S.
Defensive sectors such as telecommunications are heavily dependant on population.
Smartphone users alone are projected to grow by approximately 20% by 2021
Source: Statista 2017

26. Telecommunications Industry Average Revenue Per User
Key Business Drivers
Telecommunications Industry Average Revenue Per User
One key business driver for the telecommunications industry is average revenue per user (ARPU).
For the past two years (from FY2015) Verizon’s ARPU has dropped about 17%.
Since FY2016, AT&T has surpassed Verizon in ARPU.
Source: Statista 2017

27. Telecommunications Industry User Churn Rate
Key Business Drivers
Telecommunications Industry User Churn Rate
Churn rate is a measure of subscribers switching away from a particular company.
Because telecommunications companies are so heavily dependant on their subscriber base, churn rate is another key business driver.
Both Verizon and AT&T both have consistently low churn rate figures.
Source: Statista 2017

28. Financial Analysis

29. Financial Analysis
Our price target is $45.18, and we originally recommended to hold VZ with prices as of June 2017.
Since the time of this DCF analysis, VZ price has dropped below target.

30. Sensitivity Analysis

31. Ratio Analysis Verizon Valuation Multiples Verizon Relative to S&P 500
Source: Bloomberg as of June 2, 2017

32. Financial Analysis - Comparison
Sales Analysis
Recent Stock Performance
Profitability Analysis
Financial Position
Source: Bloomberg as of July 16, 2017

33. Stock Performance - 12 Month
12 Month Price Performance
Source: Bloomberg as of July 16, 2017

34. Risks to Recommendation
Sudden increase in losses from wireline segment, which can arise from recent changes like acquisition on XO Holdings.
A significant loss in wireless subscriber base, which is plausible in a commoditized and competitive market.
A sudden disruption in technology in the market will make it harder for larger companies like Verizon or AT&T to adapt vs a smaller carrier like U.S. Cellular.
Dependence on suppliers which may affect operating profit margins in adverse economic conditions.

35. Other Stock Analysis

36. Earnings per share (EPS)
Sprint (S)
Continued decline in Sales Revenue & losses in net income
No major new ventures; late to the 5G game: Potential launch in late 2019, behind AT&T & Verizon
Earnings per share (EPS)
2019 (Est)
2018 (Est)
2017 (Est)
Analysts Consensus
$ 0.16
($0.43) to $0.35
$ 0.05
($ 0.55) to $ 0.27
$ (0.05)
($0.25) to $0.18
VM Analysis
$ (0.03)
$ (0.03)
$ (0.08)

37. Summery SIM Portfolio Recommendation
BUY
BUY
Adjust SIM weight equal to S&P 500 Telecom Index
Increase total SIM weight by +0.50% to 2.14%

38. Any Questions?