Verizon Communications Inc. Telecom Sector Xinning Wang Verizon Communications Inc.

Contents Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Stock Recommendation Sector Overview Holding of Telecom sector stocks in both portfolios Components Trends; Sector vs. S&P 500 Business Analysis Introduce the industry dynamics How the sector is performing under today’s economic environment Economic Analysis Government bonds’ yield -> impact on the telecom sector Financial Analysis Data -> Sales Growth; Gross Margin; ROE etc. Valuation Analysis If stock is fairly priced Stock Recommendation

Sector Overview

Sector Size Total Sector Size is $1.8 Trillion as of the end of 2015. S5TELS Market Cap : 2.64% of S&P 500 Verizon is the only SIM holding : 2.38% of SIM (Market Value $251,328.50; Unit Cost $50.27) Smallest holding sector in both portfolios SIM underweight by 0.21%

Telecom Industries Diversified Telecommunication Services Company Name Market Cap (Billion $) Verizon Communications Inc. 241.59 AT&T Inc. 205.57 CenturyLink Inc. 14.94 Frontier Communications Corp. 4.57 Level 3 Communications Inc. 16.57 Wireless Telecommunication Services Diversified Telecommunication Services Alternative carriers Providers of communications High-density data transmission V and T being the largest two with Market Cap over 200 B Company Name Market Cap (Billion $) T-Mobile US, Inc. 38.27 Sprint Corp. 27.53

Telecom Industries QTD S5TELS vs. S&P 500 YTD S5TELS vs. S&P 500 Quarter to Date Starting Mid July Underperfiormed by 8% YTD Overperformed by 8.5% S5TELS S&P 500 Price Change -9.61% -1.63% S5TELS S&P 500 Price Change 13.56% 5.07%

Business Analysis

Telecom Industry Dynamics Industry structure Online becoming a bigger and bigger threat to the industry

Industry Life Cycle Wireline— Declining demand Wireless— Lack of innovation Being substituted by wireless Wireless Wireless— Segment maturing Growing at a slower pace Price competition still exist Technical innovation Wireline More households are wireless only Figure is even larger among younger population

Business Cycle Business Cycle Consumer Discretionary, Healthcare out-performed most of the sectors U.S. GDP Growth: 2.4% U.S. Inflation Rate: 1.1% 30-Year Fixed Yield: 3.56%

Business Cycle (2) U.S. economy currently in a Mid-Late period. Telecommunication industry experiencing a low pace of growth. No clear pattern. Stocks fair priced.

Correlation to S&P 500 One of the lowest among S&P 500 sectors Beta = 0.752

Geography and Users Over 98% Americans live in areas with LTE coverage 44.1% of U.S. adults use wireless service only (54.1% for children) Wireless Subscribers Wireless Penetration Wireless Only Households 377.9M 115.7% 48.3%

Telecommunication Trends Wireless subscriber used 10 Trillion megabytes of data last year Number of subscribers and gross spending experienced a steady in the past 10 years

Porter’s Five Forces Analysis Buyer Power (Moderate) Producers provides various of different products, while buyers can switch producers with a comparatively low cost Supplier Power (Moderate) Very similar products provided by several other major competitors Barrier of Entry (High) An oligopoly market, only a few companies are involved; High fixed cost; Capital Intensive Threat of Substitution (High) Online services (Skype/Facetime) being the biggest threat; Companies are working on their own innovation Competition and Rivalry (High) Price competition on a regular base

Economic Analysis

Interest Rate 10-Yr US Generic Government Yield 10-Yr treasury rate increased from a short-term perspective Reduced the attractiveness of telecommunication industry Not clear Some what negatively related

Unemployment Rate S5TELS is negatively related with unemployment rate.

Financial Analysis

Sales Growth Sector vs. S&P 500 Telecommunications Sector underperformed S&P 500 over the past 10 years.

Sales Growth Key Firms (VZ vs. T) AT&T has recorded a better performance compared to Verizon since the year of 2015. AT&T restructured their wireless service plans by focusing more on no-contract options.

Gross Margin Sector vs. S&P 500 Telecom is now having a higher Gross Margin than the S&P 500 portfolio. Verizon Communications Inc. has the highest gross margin within sector.

Profit Margin Sector vs. S&P 500 Telecom sector records better Profit Margin compared to S&P 500 for the past 10 years. Telecom is capital intensive.

ROE Sector vs. S&P 500 Telecom sector has a lower ROE than S&P 500 in most of the years.

D/E Sector vs. S&P 500 Capital intensive industry benefit from low-cost debt. S&P 500 has an average lower debt level after the financial crisis, while the telecom sector is only slightly affected.

Valuation Analysis

Multiples: Absolute & Relative S&P 500 Absolute Basis High Low Median Current P/E 22.5 8.9 15.8 17.1 P/B 3.6 1.2 2.1 3.1 P/S 1.8 0.8 1.3 1.6 P/EBITDA 5.8 2.5 4.2 4.8 Relative to SP500 High Low Median Current P/E 1.20 0.70 0.92 0.81 P/B 1.46 0.53 0.98 0.79 P/S 1.32 0.66 0.90 1.02 P/EBITDA 0.34 0.56 0.40 Relatively cheap; Sector under-priced

P/E and P/EBITDA Sector vs. S&P 500 P/E Telecom vs. S&P 500 P/EBITDA Telecom vs. S&P 500

P/B and P/CF Sector vs. S&P 500 P/B Telecom vs. S&P 500 P/CF Telecom vs. S&P 500

Recommendation

Recommendations Increase the weight of Telecom Sector Stocks in SIM Hold more AT&T Stocks Target price for both stocks are higher than current trading prices Stable dividends helped to reduce risk Wireless industry in a growing period (high expectation)

Q&A?