general body meeting 10/6/10 1. mutual investment club of cornell agenda announcements headlines ...

General Body Meeting 10/6/10

1

Mutual Investment Club of Cornell

2

Agenda

Announcements Headlines Tech Sector Conviction List Telefonica Pitch


3

Goldman Sachs Junior Board

October 20th 10:30AM Location TBD


4

Buying shares

You are dropped as a junior analyst after today if you still have not invested


5

iGo Inc. Headline


6

iGo Update

iGo awarded Cisco Flip Video accesories Flip Ultra has 13% camcorder market

Awarded new patents in September Using primary side circuit Individual outlet shut offs

Dual-USB charger Earnings out 10/22


7

Macro Headlines


European Worries

Moody lowered Spain’s credit rating AAA---Aa1 Growth expected to lag (1% for several

years and 20% unemployment) Gov’t proposed 7.9% budget cuts and

increased taxes Ireland expected be downgraded again

in Jan Credible cuts vs decreased tax revenue

Anglo Irish Bank Bailout-$46B (total $68B)


Japan

Central bank of Japan push rates to 0% Bought $60B risky assets (corporate

bonds, REITS) Attempt to battle a strong Yen Keep at virtually 0% until ends

deflationary pressures

Expect Fed to engage in quantitate easing Estimated in the area of $1 trillion


10

Energy Headlines


Hydraulic Fracturing

“Fracking” – the process in which natural gas is extracted by means of pressure-drilling a mix of water, sand, and chemicals more than a mile vertically and horizontally into the earth (99.5% sand and water, .5% chemical)

Currently used in more than 90% of 450,000 natural gas wells without any incident

Fracking is exempt from the Safe Drinking Water Act, which means it is currently not federally regulated

Debate: Does fracking end up polluting water, thereby harming plants, animals, and humans, during the release of chemicals?

EPA (Environmental Protection Agency) is doing a study to be completed in 2012 that will study the health and environmental effects of fracking


12

What This Means for Energy

It is estimated that 60-80% of new wells need fracking to remain viable

Ban on fracking will mean less reserves and higher natural gas prices

Possible step forward for other cleaner and greener technology (wind, solar)

However, because the report will come out in 2012, this will most likely not affect the companies that we currently invest in (something for current freshman and sophomores to look into )


BP New Executive, New Outlook

New CEO Robert Dudley Reorganization of firm’s exploration and

production business into three divisions – exploration, development, and production

Improved Safety Standards – New Safety Division headed by Mark Bly with additional powers to oversee and audit the company’s operations; internal police force

Remains to be seen if the safety procedures will be implemented


14

Technology Sector Conviction List


15

BSQUARE (BSQR)

Zach Peskin


BSQUARE - Overview

Expertise in embedded systems Products:

TestQuest Pro: a test automation tool SDIO Hx: integration of peripherals with

smart devices Expertise with hardware and software Major project: Ford’s Synch


17

BSQUARE - Financials

Market Cap: $33.5 Million Revenue: $75.5 Million Gross Profit: $13.5 Million Quarterly earnings growth: 1,041.7% Cash per Share: $1.51 Zero Debt


18

BSQUARE – Catalyst

Ford (or other automobile maker) could acquire BSQR

BSQR finds another large customer


19

Verizon (VZ)

Josh Lyons


Verizon Communications (VZ)

US-based communications services provider Broadband, wireless, and wireline services Over 91.2 million business, government, mass market, and

wholesale customers Wireless voice, data services and other value-added services,

voice, internet access, broadband video and data, next generation Internet Protocol (IP) network services, network access, long distance and other services

Price at 10/5/2010, $33.57 (52wk range: 25.99-34.13)


Verizon Communications (VZ)


Investment Themes

Net Neutrality: power to the carriers Joint Google + Verizon proposal Mobile ISP internet to not be

covered by guaranteed neutrality Carriers able to discriminate on

what content goes over their network

Potential to charge premium fees for access to premium online services

Tremendous power for cellular carriers to exploit high value users

Verizon, AT&T, etc, to no longer be a ‘dumb pipe’

Significant new revenue stream, the effect of which will be compounded by the continuing rise of mobile internet

22

Verizon to win the 4G war First rollout of LTE SIM-based technology Largest, most stable network Highest smartphone data rates End of unlimited data

Rise of Android, CDMA iPhone Android growth Exclusive devices, Droid Series Verizon iPhone in field test stages Forecasted: January 2011 Projected 12m annual sales


23

Telefonica S.A. (NYSE: TEF)Samantha Dong

Alex Friedman

Shashank Samala

Ali Yazdi

John Yoshida


24

LatAm Telecom Market


25

Telecom in Mexico

GDP: $1.09 trilliun; Population: 112 million

Mobile Penetration rate: 43% Currently monopoly economy

Fixed line: 94% by Telmex (AMX) Mobile: 80% by Telcel (AMX)

Growing competition from 3G spectrum auctions Nextel got government wireless license


Telecom in Brazil

GDP: US$ 1.58 Trillion; Population: 192 million Mobile Penetration rate: 90.55%

26

PNAD 2008 RI RII RIII Brazil

Income (R$) 704 927 992 820

Pop. (mm) 104.3

44.8 40.8 190.0

Household (mm)

30.4 14.3 12.9 57.6

Mobile + Fixed - %

30 41 58 39

Just Fixed - % 4 4 8 5

Just Mobile - %

42 45 27 39

No phone - % 24 10 7 17

With comp. - %

24 37 47 32

No comp - % 76 63 53 68


27

More Opp. in Brazil Market

30%

25%

21%

24%

Number of Subscribers

Vivo/Telefon-icaClaro/AMXOiTIM


28

Brazil – Market Trend

Mature local fixed voice Lower traffic per terminal (FMS in traffic)

Continued expansion in mobile market Strong competition Strong market evolution: pre-paid (naked SIM

card) market Broadband growth accelerating

Competition in areas that concentrate high-end clients

3G changing dynamics of industry


29

Fixed lines Vs. Mobile


30

Why Not AMX?


AMX Overview

Leading telecom provider Biggest in Mexico, second in Brazil Wireless, Fixed line, broadband, etc.

Pitched Sep 2008 Strong presence in Latin America. Looking for a long term investment: 1-2

years Price Target at end of 1 year: $60 (22.4%

gain)

31


Performance32

$ 48.61$ 54.29

12% return after 2 years


33

Breakdown

Wireless81%

Fixed lines11%

Broadband5%

television3%

259 Million Subscribers

1 As of June 2010

Mexico36%

Brazil 20%Mer-

cosur9%

Andean 16%

Central Amer-ica & Carib-bean 11%

United States 8%

Sales Revenue


Recent News – Integrated Service

Fixed line in Mexico: Telmex Fixed line in Brazil: Telmex Internacional

(Embratel), NETC

34


35

Brazil

Wireless: Claro 26% market share, 46.9 million wireless

subscribers Embratel (TII) – Claro (AMX) Merger

Represent 85% of total synergies: cost reduction

Synergies are offset by premium paid Decreased Revenue forecasts by elimination

of intercompany transaction


36

What We Don’t Like

Focus on less attractive markets Mexican Market

Growing competition potential hurts AMX Fixed Line Market

Weaker presence in Brazil wireless market

Stock Valuation


37

Why TEF?


38

Company Overview

One of the world’s largest telecommunications companies by market cap. (115.66B)

Activities include fixed and mobile telephony businesses, while its broadband business is the key growth driver underpinning both.

Growth strategy is focused on the markets in which it has a strong foothold: Spain, Europe and Latin America


39

Market Size Globally


40

Latin American Market

Telefonica Latin America Fixed telephony accesses = 24,514.90 Internet and data accesses = 7,911.50 Mobile accesses = 141,822.20 Pay TV = 1,735.40

Total accesses = 176,102.80

Top Latin American Countries (% of total accesses)

Brazil – 71,353.90 (40.54%) Argentina – 22,396.90 (12.72%) Mexico – 18,687.50 (10.61%)


41

European Market

Telefonica Europe Fixed telephony accesses = 3,563.7 Internet and data accesses = 4,382.4 Mobile accesses = 45,217.00 Pay TV = 194.10


Top Telefonica Europe Countries (% of total accesses)

UK – 22,255.6 (40.80%) Germany – 22,006.90 (40.35%) Czech Republic – 7,672.00 (14.07%)


42

Spain Market

Telefonica Spain Fixed telephony accesses = 13,663.90 Internet and data accesses = 5,823.0 Mobile accesses = 23,879,10 Pay TV = 747.80



43

Total Accesses by Market

176102.863%54541.6

20%

47117.917%

Telefonica Latin America Telefonica EuropeTelefonica Spain

* Total Accesses in Thousands


44

Brazil’s Operations in 2009


Telefonica/Vivo Deal

Jul 28 – Bought Portugal Telecom’s 60% stake in Vivo, Brazil’s largest wireless company, for EUR 7.5B, adding to its’ 40% stake before the deal

Strengthened position in the booming Brazilian market

EPS and FCF accretive from 2010: +€3.5bn impact in net income in 2010 derived from the business combination achieved in stages in Vivo

€2.3/2.7bn1 from operating synergies and benefits from Telefónica’s management model

Additional €1/1.5bn1 savings from financial and tax synergies (so total of about 4bn saved due to synergies)

Limited Impact on leverage (0.3x)

45


46

Telefonica/Vivo Revenues

First half of 2010: Brazil TEF Revenues – 4.877B EUR, of which 1.825B EUR from Vivo and the rest from Telesp.

Second half of 2010 est. - From the acquisition and assuming 5% growth, expected second half revenues – 7.67B EUR, of which 4.62 B EUR from Vivo.


47

Brazil Market Cont.

8.3760000000000136%

14.60764%

Revenues (2009)

Brazil (in Billion EUR)Rest of Latin Amer-ica

12.54744%16.06

56%

Revenues (2010 Es-timated)

Brazil (in Billion EUR)Rest of Latin Amer-ica


48

Some stats on Vivo

Vivo reported 56.0 million accesses at the end of June 2010, increasing its customer base by 19.6% year-on-year.

First-half wireless data revenue increased 70.2% year-on-year, 81.5% in the second quarter. Data revenues now account for 17.4% of service revenues (+6.3 percentage points year-on-year)


49

EWZ Vs. TEF

Vivo Acquisition


50

Financials and Valuation


51

Ratio Analysis

TEF AMX Industry

Market Cap: 115.66B 110.04B 5.37BGross Margin (ttm): 59.18% 57.06% 59.18%P/E (ttm): 10.41 15.08 13.3EV/EBITDA 6.02 8.9 n/aP/B 4.19 5.19 n/aCurrent Ratio 0.63 1.6 n/aDividend Yield 6.30% 0.50% n/a Potentially undervalued Liquidity Concern: $70 billion net debt Dividend Yield

Source: Yahoo! Finance


52

Valuation: December 2010

Comparable 1P/E 2010E

Vodafone Group PLC 10.9Telefonica 10.2America Movil 13.0

Deutsche Telekom 15.2France Telecom 8.9Average 11.64XEPS 2010E 7.38Price 85.90

Comparable 2

P/S 2010EVodafone Group PLC 1.7Telefonica 1.4America Movil 2.8Deutsche Telekom 0.7France Telecom 0.9Average 1.5XSales/Share 2010E 52.10Price 78.16

Analyst Consensus: 81.60Source: morningstar, yahoo! finance


53

European Exposure


54

European Presence


55

Revenue Breakdown by Country

Source: CapitalIQ


56

Visualization

35%

12%

7%4%2%

41%

1%

Revenue Breakdown by Country

Spain UKGermany Czech RepublicIreland Latin AmericaCorporate and Other

Source: CapitalIQ


57

Risk Factors

General European Competition Spain Questions EUR Exposure


58

TEF Performance vs. Euro


59

Euro Correlation

Strong Correlation to Euro (EUO is shown-Proshares UltraShort Euro)

Remedies: 1) Options

2) Buy EUO


60

Technical Analysis


61

Quaneam Analytics


62

Quaneam Analytics


63

Quaneam Analytics

Using 300 days of past data the Z-scores follow:

BollingerBands= 0.88

MACD= 2.14

RSI= 1.78 Aggregating these we get an average Z-score

of: 1.60

0-----------------Median--------------TEF-1 This means that conditional to the past 300

days of data, TEF is at the upper 6% of its evaluation range.


64

Quaneam Analytics

Enter trade at $70-71 range to take advantage of suspected correction


65

Conclusion


66

Proposal

Thesis Best position in growing Brazil mobile

market Company focus shift towards Latin America

More attractive valuation than AMX and other competitors

High Dividend Yield

SOLD AMX, BUY 29 shares of TEF with limit $71OPTIONS?


Quaneam Analytics

The Call

The Put


Quaneam Analytics

The Hedge


69

Vote


70

Thanks for coming by

general body meeting 10/6/10 1. mutual investment club of cornell agenda announcements headlines ...

Documents

b slide

new wells

new patents

incident fracking

natural gas wells

polluting water

mix of water

b total