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TELECOMMUNICATIONS SECTOR ANALYSIS

Ankita Agarwal

Jackie Gleason

Jason Stegall

Sector Overview

Analysis

• Business Analysis

• Economic Analysis

• Financial Analysis

• Valuation Analysis

Recommendation

AGENDA

Sector Overview

Weights

Name S&PPercentage Market Over/Under

Financials 15.22% 17.57% 2.35%

Telcom 3.20% 3.34% 0.14% Information Technology 17.79% 15.82% (1.97%)Consumer Discretionary 10.65% 9.07% (1.58%)Consumer Staples 10.60% 11.71% 1.11%

Energy 12.68% 10.87% (1.81%)

Industrials 11.02% 10.11% (0.91%)

Healthcare 11.80% 9.85% (1.95%)

Materials 3.66% 3.28% (0.38%)

Utilities 3.38% 5.97% 2.59%

Cash 0.00% 2.40% 2.40%

Total 100.00% 100.00%

SIM Portfolio

Financials

Telcom

Information Technology

Consumer Discretionary

Consumer Staples

TELECO

MPortfolio

Industries

Integrated Telecommunication Services

Wireless Telecommunication Services

The Wireless Telecommunications Services industry consists of companies engaged in providing wireless communication services, such as paging, cell phone and other satellite telecommunication services. The industry excludes cable television services utilizing satellite delivery.

The Integrated Telecommunications Services industry consists of companies engaged in providing telecommunication services other than wireless. The industry includes integrated providers of both fixed-line and wireless services offering voice, data and high-density data transmission services.

Largest Companies

Wireless Telecomm. Services

TELECO

MIntegrated Telecomm. Services

• AT&T

• Verizon Communications

• Chunghwa Telecom Co. Ltd

• BCE

• NII Holdings

• American Tower Corporation

• SBA Communications

• Vodafone

• Telefonica

• Bharti Airtel Limited

TELECO

MCurrent Position Information

Current Position:14 Bps Overweight

Current Holdings:

NII Holdings (NII)

Return: $193,536

Prospective Companies:

SBA Communications (SBAC)

American Tower Corporation (AMT)

BUSINESS ANALYSIS

TELECO

MLifecycle

Traditional Land-lines are mature, however there are horizontal growth opportunities (DSL, UVERSE, etc)

Wireless service is still up and coming especially in foreign markets (Like NIHD and AMT)

Heavy Capital Expenditure needed to maintain international growth, existence of economies of scale

Typically growth follows upgrades to network. Smaller companies can handle upgrades better because they have smaller network.

The user and geography

User:

Anyone, everyone these days seem to use cell phones, even the Amish. Cell phones connect people without the added cost of physical assets such as copper wiring, substations, even infrastructure in general.

Geography:

Everywhere in the world Telcom has been on the margin of business since the 1800s. From the telegraph, to the phone, to the modem, to the cable/wireless structure we have today. Telcom is the hare, and as such needs to evolve with the shrinking world.

TELECO

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External Factors

Political Headwinds:

President Obama’s State of the Union address identified a national broadband network as a national goal, and wireless is the future of broadband.

Currency Exposure:

Most of the businesses in our analysis are U.S. companies that are susceptible to fluctuations in the dollar. Given the current environment this could be mitigated by currency swaps, however, there would be a large transaction cost for this position. This could also be over-come by synthetic portfolios or simply by investing in a variety of countries and balancing based on inflationary pressures.

TELECO

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TELECO

MFive Forces Analysis

Competition within the Industry

(High)

Barriers to Entry

(High)

Buyer Power

(Moderate)

Substitutes

(Moderate)

Supplier Power

(Low)

The sector is very capital intensive and entry is governed by the FCC

Buyers are the end use customers and have moderate power

Suppliers are varied with none holding key technology

Technology always presents a risk that a new product will change the market

The market is starting to mature and companies are competing for market share

ECONOMIC ANALYSIS

TELECO

MGDP vs. Telecom

The telecom sector is a defensive sector.• Little correlation between sector performance and the GDP

S&P 500 EPS vs. Telecom

The telecom sector is a defensive sector.• Counter cyclical correlation between sector performance and the EPS of the S&P 500

TELECO

MBusiness Capital Spending vs. Telecom

The high r-value indicates that telecom performance aligns with business investment in capital projects.

• r-value is very close to that for the Integrated Telecom Service Industry• The r-value is much lower for the Wireless Telecom Service Industry

TELECO

MConsumer Spending vs. Telecom

While consumer spending influences sector value, it is only moderately correlated.• It is important to note that the r-value for the Wireless Telecom Service Industry is 0.70, indicating that consumer spending on wireless devices and services drives industry value.

TELECO

M10-Year Treasury Yield vs. Telecom

The r-value reflects some influence of treasury rates on this capital intensive industry.

FINANCIAL ANALYSIS

TELECO

MEstimated Changes

TELECO

MEstimated Changes

TELECO

MFuture Earnings Outlook

Earnings Surprise

Earnings Surprise

SBAC

AMT

NIHD

Dividend Yield

Dividend Yield

EBITDA, Nat Profit Margin and ROE

TELECO

MTelecom ROE Outlook

Return on Equity

Return on Equity relative to S&P500

VALUATION ANALYSIS

TELECO

MTelecom Sector Valuation Ratios

High Low Median CurrentTrailing P/E 26.7 9.7 16.3 17.8

Forward P/E 32.8 10.5 15.6 16.5

Price to Book 2.7 1.0 1.9 1.8

Price to Sales 2.1 0.9 1.4 1.2

Price to Cash Flow 8.5 3.5 5.4 5.5

TELECO

MTelecom Sector Valuation Ratios vs. S&P 500

High Low Median CurrentTrailing P/E 1.3 0.68 0.93 1.2

Forward P/E 1.4 0.77 0.96 1.2

Price to Book 1.0 0.4 0.7 0.8

Price to Sales 1.4 0.8 1.0 0.9

Price to Cash Flow 0.7 0.4 0.5 0.6

TELECO

MIntegrated Telecom Industry Valuation Ratios

High Low Median CurrentTrailing P/E 2.0 9.1 14.7 14.5

Forward P/E 22.4 9.9 14.3 13.9

Price to Book 3.4 1.0 2.0 1.8

Price to Sales 2.0 1.0 1.4 1.2

Price to Cash Flow 7.6 3.5 5.4 5.2

TELECO

MIntegrated Telecom Industry Valuation Ratios vs. S&P 500

High Low Median CurrentTrailing P/E 1.1 0.58 0.86 1.0

Forward P/E 1.1 0.68 0.89 0.99

Price to Book 1.1 0.4 0.8 0.8

Price to Sales 1.4 0.8 1.0 0.9

Price to Cash Flow 0.6 0.4 0.5 0.5

TELECO

MWireless Telecom Industry Valuation Ratios

High Low Median CurrentTrailing P/E 175.8 12.0 22.9 NM

Forward P/E 286.6 14.6 22.7 NM

Price to Book 10.2 0.3 1.4 2.0

Price to Sales 3.0 0.4 1.2 1.1

Price to Cash Flow 33.3 1.6 6.1 8.3

TELECO

MWireless Telecom Industry Valuation Ratios vs. S&P 500

High Low Median CurrentTrailing P/E 9.4 0.78 1.40 NM

Forward P/E 15.8 0.95 1.50 NM

Price to Book 2.7 0.2 0.6 0.9

Price to Sales 1.9 0.5 0.8 0.8

Price to Cash Flow 2.4 0.2 0.6 0.9

RECOMMENDATIONS

Recommendation

We recommend an increase to overweight by at least 100 basis points. We believe the integrated market provides a good value play and is underserved by the current portfolio. In addition, existing providers can increase margin by providing additional service options. After longer periods of time, bandwidth will become commoditized and overall return will slow.

Areas for expansion:

Infrastructure/Newer Technologies (4G, LTE, WiMax, VOIP)

Emerging Markets

Subscription Based Services

TELECO

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Reasons We Like TelcomT

ELECOM

•Lucrative upside•Defensive•Fashionable (IPhone) •Exposure to information (access to call records, etc. Important and costly information for lawyers).•Access to new markets/younger user base.•Emerging Technologies•Bring everyone closer together.

QUESTIONS?