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Telecom Stock

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Verizon and Alltel are capturing the gains of the telecom ... Concentrating on their wireless capabilities- 70% of the revenue mix ... Verizon Wireless ... – PowerPoint PPT presentation

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Title: Telecom Stock


1
Business Finance 724
Telecom Stock November 29th 2005
Analysts Rajan Sheth, Sara Smith
2
Sector Recommendation
  • Currently SIM us underweight by 0.76, holding
    2.31 while the SP is at 3.07
  • Match weight of the SP 500, 3.07
  • MA creating larger divisions between major
    competitors
  • Verizon and Alltel are capturing the gains of
    the telecom sector-safe bet to at least match
    the SP
  • If not, SIM will not capitalize on the
    outperforming companies in the Sector

3
  • Stock Presentation
  • Company Overview
  • Financial Analysis
  • Valuations
  • Model Evaluations
  • Recommendations

4
Company Overview
  • Alltel is a customer focused telecommunications
    company
  • Concentrating on their wireless capabilities-
    70 of the revenue mix
  • They have grown revenue at approximately 8 per
    year by means of acquisitions
    licenses, customers, or entire entities
  • Alltel is currently experiencing a growth spurt
    - 20 growth in revenue over last year
  • Shining star of telecom sector

5
Financial Analysis
  • Jump after earnings
  • Dividend yield compared to 3.97 sector
    average

6
Historical Returns
Outperformed the sector
Outperformed the market
7
Income Statement
  • Revenues are growth driver
  • 20 growth in revenue 3Q 2005

8
Balance Sheet Ratios
  • Highest Current and Quick Ratios in the
    Sector
  • One of Lowest Days Receivable in the Sector

9
Cash Flow
  • Consistent and increasing free cash flow
  • Cash from operations the main source of cash
  • Cash from Investing is consistently negative due
    to acquisitions

10
Relative Analytics
  • ROE better than mean
  • Net Profit Margin much higher than
    sector average
  • Growth rate estimates increasing
  • Priced much higher than the rest of the
    sector-will continue

11
Absolute Valuation
  • Recently started selling above the
    mean
  • We expect this trend to continue

12
Valuation- Multiples
Current Price- 67.44 Target Price- (76.08/67.44)
2.28 DIV YIELD 15.09 Projected Return
Yahoo Finance Key Statistics  Forward P/E (1
yr)18.57 P/S (ttm)2.86
13
Recent News
  • Alltel completed the acquisition of Western
    Wireless in 3Q of 2005, and seeing the growth
    in revenue
  • November 18th, Alltel reached a definitive
    agreement to purchase Midwest Wireless for
    1.075 billion in cash, more revenue growth
    on the way
  • Alltel is in negotiations to spin-off their
    wireline division

14
Model Valuation
  • Current Price 67.44
  • Target Price 76.49
  • Return 13.49 Dividend Yield 2.28 Total
    Yield 15.77

15
Recommendation
  • BUY 76 BASIS POINTS
  • Pros
  • Revenues are historical growth driver, and
    revenue projections/potential are up
  • Consistent Performer in an under performing
    sector
  • Valuations with conservative estimates
  • Cons
  • Stock price is high relative to sector
  • Spinning off their most profitable division in
    order to focus on growing division

16
Company Overview
  • Verizon Communications is one of the worlds
    leaders in communication services
  • Comprises of 4 major business segments
  • Domestic Telecom
  • Wireless
  • Information Services
  • International (Wireline and Wireless)
  • Diversified in an aging sector

17
Company Overview
  • Domestic Telecom
  • Major provider of local, long-distance, data and
    broadband services
  • Revenues of 38.6 billion
  • Wireline assets serve two-thirds of the top
    100 U.S. markets
  • 7.1 billion capital investment
  • Verizon Wireless
  • Leading wireless services provider with the
    nations most reliable wireless voice network
  • Revenues of 27.7 billion
  • 43.8 million customers
  • 5.6 billion capital investment
  • International
  • Wireline and wireless operations and investments
    primarily in the Americas and Europe
  • Revenues of 2.0 billion
  • Information Services
  • Leading print and online directory publisher and
    content provider
  • Revenues of 3.6 billion
  • 128 million circulation worldwide
  • 1.2 million advertising customers
  • 134 million monthly searches on
    superpages.com

18
Financial Analysis
  • Dividend yield compared to 3.97 sector
    average
  • Largest Market Capitalization in sector

19
Income Statement
  • Verizon revenues have been growing substantially
    compared to the SP-50
  • Net Income is healthy
  • EPS is significantly higher

20
Balance Sheet Ratios
  • Verizon is more liquid than sector
  • Carries less debt as a percentage of
    capital

21
Cash Flow Statement
  • Sector is not spending heavily on Capex
    but still has reduced cash flow
  • Verizon is being proactive at a small
    loss in Free cash Flow

22
Dupont Analytics
  • Sector is significantly less profitable
    than Verizon
  • Verizon is expecting to see gains on in
    it FiOS/ FTTP which will help future
    ROE

23
Valuation- Multiples
Current Price for Verizon 32.14 Target
Price 44.50 Upside(44.50/32.14)-1
38
24
DCF Analysis
25
Model Valuation
  • Current Price 32.14
  • Target Price 45.00
  • Return 40.00 Dividend Yield 5.07Total
    Yield 45.07

26
Recommendation
HOLD at Current weight
  • Pros
  • Stock is currently undervalued with strong growth
    potential
  • Triple Play Strategy of Voice-Video-Data
  • Strong Dividend Yield
  • Early entry in to FTTP/ FiOS technology will
    provide consumers with greater bandwidth,
    services and allow Verizon to provide a
    combination of services with a competitive
    pricing strategy
  • Diversified product lines
  • Cons
  • High Capital Expenditure
  • Revenue growth will be slow but hopefully
    increase in the next 2rys
  • Price Erosion

27
Overall Recommendation
BUY ALLTEL
HOLD VERIZON
  • Increase weight to that of sector 3.07 (76bpts)
  • Capture gains from the companies that are making
    gains in an underperforming sector
  • Place increase on ALLTEL due to risks associated
    with Verizon
  • Reevaluate Verizon in future
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