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

2. 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

3. Sector Overview

4. 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%

5. 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

6. 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%

7. Business Analysis

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

9. 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

10. 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%

11. 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.

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

13. 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%

14. 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

15. 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

16. Economic Analysis

17. 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

18. Unemployment Rate
S5TELS is negatively related with unemployment rate.

19. Financial Analysis

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

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

22. 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.

23. 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.

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

25. 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.

26. Valuation Analysis

27. 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

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

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

30. Recommendation

31. 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)

32. Q&A?