Buy Presentation Template

Report
0
Buy Presentation: Verizon
Communications Inc.
March 27, 2012
Presentation Prepared By:
Colton Shoenberger, Matthew McLaughlin, Matthew Rich,
and Henry Apostoleris
Investment Thesis
Thesis
Verizon Telecommunications Inc. would make a strong defensive position in Ithaca College Investment Club’s portfolio because of its
strong economic moat, high returns and profit margins, low volatility (beta .54), considerable dividend, and sustainable future
profitability. The company boasts industry-high wireless network quality along with industry-low churn rates, as well as the largest
LTE network, nearly three times as large as the next largest U.S. LTE network (AT&T). In addition, Verizon’s operations are welldiversified compared to its smaller competitors, and the company is experiencing considerable growth with its FiOS television and
internet services. Moving forward, minority wireless competitors, lacking significant cash amounts for capital investments, will have
trouble competing with Verizon as demand for smartphones and data availability increases.
Stock Price (One Year)
Revenue 2007-2011
Verizon Revenue, 2007-2011
115,000
Revenue ($ Million)

110,000
105,000
100,000
95,000
90,000
85,000
80,000
2007
2008
2009
2010
2011
2
Industry Overview and Recent Trends


Telecom is an industry of high fixed-costs and low variable costs
–
Competitors rely on cash flow to expand networks and services
–
Operators often take in substantial debt to finance capital expenditure
Trends
–
Major revenue stream shifting from voice to data (texts, images, internet access, etc.)
–
3G to 4G LTE
–
Postpaid to prepaid shift
–
Voice Over Internet Protocol (VoIP)
–
Fiber Optic TV and broadband internet
3
Company Overview and Operations
Company Overview

Verizon Wireless is the industry leader in United States mobile plans and phone sales

Operations
–
Mobile Voice and Data Plans (Postpaid and prepaid)
–
Phone and Equipment Sales
–
FiOS Television
–
Landlines (Business Enterprise, Small Business and Home)
–
Broadband Internet
Revenue Stream Breakdown
Wireless Breakdown
Domestic Wireless (Services and Devices)
Wireline (Fixed-Line, Enterprise, Television and Internet)
Voice and Global Services
Data Services
Devices
Other
4
Recent Telecom News

Verizon raises lease fees for FiOS TV DVR 6% ($15.99 to $16.99/month), and increases set-top box rates 17% ($5.99 to $6.99
monthly) (3/23)

FreedomPop plans to release an iPhone WiMAX shell providing 1GB of free data per month; “freemium” mobile broadband (3/23)

T-Mobile cuts 1,900 jobs and closes seven call centers (3/21)

Verizon and Comcast executives gave testimony to Congress defending proposed $3.6 billion spectrum and marketing deal as a way
for Verizon to handle a coming spectrum crunch (3/20)

AT&T acquisition of T-Mobile rejected by Congress; costs AT&T approximately $4.2 billion in losses (2/23)
5
Valuation Comparable
Price
Mkt. Cap
EPS
P/E
Dividend
Div./Yield
Beta
Verizon (VZ)
39.73
112.5
2.16
18.4
1.98
5
0.55
AT&T (T)
31.71
188 B
2.18
14.5
1.73
5.56
0.59
2.74
8.2 B
-0.88
-
-
-
1.07
11.95
51.61 B
0.17
70.03
0.92
8.1
-
10.13
773.7 M
-3.91
-
-
-
1.5
10.56
3.5 B
0.84
11.6
-
-
0.85
42.46
3.59B
2.1
19.7
-
-
0.86
Sprint Nextel (S)
Deutsche Telekom
(DTEGY)
LEAP Wireless
(LEAP)
MetroPCS (PCS)
United States
Cellular (USM)
6
Operating Comparable
Total Debt to
Assets
Verizon (VZ)
AT&T (T)
Sprint Nextel (S)
Deutsche Telekom
(DTEGY)
LEAP Wireless
(LEAP)
MetroPCS (PCS)
United States
Cellular (USM)
Total Debt to
Equity
Return on Assets
Return on Equity
Return on Capital
Pretax Margin
EBITDA Margin
23.9
153.3
1.1
6.5
9.2
9.5
26.5
24
61.4
1.5
3.6
3.7
5.3
24.1
41.1
177.4
-5.7
-22.3
-
-7.8
15.1
39.4
136.9
0.4
1.5
1.4
5.2
32.4
62.5
525.1
-6.3
-41.3
-
-9.1
17.8
50
162.1
3.5
11
6.7
9.9
26.6
13.9
24.3
2.9
4.9
5.9
7.2
19.6
7
Sector Ratio Analysis
Valuation Ratios


Price to Sales
Financial Strength

Current Ratio
–
Verizon: 1.01
–
Verizon: 1.01
–
Sector: 1.23
–
Sector: 1.41
Price to Cash flow

Interest Coverage (TTM)
–
Verizon: 4.18
–
Verizon: 7.64
–
Sector: 8.01
–
Sector: 0.11
Profitability


Operating Margin (TTM)
Efficiency

Receivable Turnover
–
Verizon: 11.62
–
Verizon: 9.41
–
Sector: 14.30
–
Sector: 6.13
Net Profit Margin (TTM)

Inventory Turnover
–
Verizon: 9.20
–
Verizon: 44.30
–
Sector: 7.99
–
Sector: 31.33
8
Competitors
AT&T (T)

Strengths
–

Similar dividend, beta, and economic moat to Verizon
Weaknesses
–
Recent T-Mobile acquisition failure caused $4.2 billion in losses
–
Recently abolished unlimited data plan; may lead to increased churn rates
–
Fewer data plan options than Verizon
–
Smaller 4G LTE network than Verizon (about 1/3 the size)
Sprint (S)

Strengths
–

Near 52 week low
Weaknesses
–
High degree of uncertainty/high volatility
–
As data services become more important to the industry, Sprints current financial instability will make it hard to compete with larger rivals
–
Smaller 4G LTE network than Verizon
9
Competitors
Deutsche Telekom (T-Mobile; DTEGY)

Strengths
–

MetroPCS (PCS)

Recent joint venture with France Telecom (FTE) in UK
Strengths
–
Record level of subscriber additions, revenue, and adjusted
EBITDA in 2011faciliated by postpaid to prepaid trend
Weaknesses
–
Low margins, especially in the U.S.
–
Recently cut jobs and call centers

Weaknesses
–
Small margin for execution error due to high penetration rates
and contracting margins
–
Many customers currently running on outdated CDMA network
incapable of satisfying increasing data demands
–
High churn rates
LEAP Wireless (LEAP)

Strengths
–
Weaknesses
–
Multiyear low margins will make 4G build out difficult as
competition intensifies; strains on company profitability
–

Upgrading its smartphone lineup, leading to higher ARPU and
lower churn

U.S. Cellular (USM)
Strengths
–

Strong ARPU on smartphone customers
Weaknesses
–
Postpaid subscriber base has shrunk all four quarters in 2011
–
Declined to offer iPhone
–
Spectrum gap between USM and competitors increasing
Rejected merger offer from MetroPCS in 2007 suggests
management more interested in building a company than
maximizing shareholder value
10
SWOT Analysis
Strengths
Weaknesses

Considerable dividend, good returns and profit margins

Near 52 week high

Industry-low churn rates (customer loyalty)

Need to make heavy investments on spectrum to prevent

Industry-high network and product quality (smartphone and
competition and encourage 4G and heavy data plans
data availability)

Upgrading fixed-line network despite declining demand

Strong economic moat (ability to purchase spectrum)

Lack of customer care centers compared to competitors

Has a customer base of 49.3 million in the U.S. alone, gained
2 million postpaid subscribers in 2011

Brand name
Opportunities

Increase in demand for 4G LTE technology will pull strong
Threats

Potential FCC regulation on spectrum auctioning would help
profit margins along with easing network quality with
minority mobile companies compete with Verizon’s network
customers split between 3G and 4G phones
quality

iPhone 5 and new iPad will use LTE technology

AT&T rising prices on unlimited plan and removing unlimited
Verizon’s postpaid plans, stifle 4g LTE adoption, and push
data plan
customers toward cheaper pre-paid options from MetroPCS or
Foreign opportunities to expand business into Canada, Asia
LEAP


Economic downturn could push consumers away from
and some parts of Europe

Expansion on audio conferencing services (VoIP)
11
Analyst Recommendations



Analyst Recommendations and Fair Value Estimates
Firm
Recommendation
Target Price
BMO Capital Markets
Outperform
44.00
Goldman Sachs
Buy/Neutral
44.00
Hilliard Lyons
Buy
41.00
Jefferies
Buy
45.00
JP Morgan
Neutral
40.00
Macquarie
Outperform
45.00
Openheimer and Co.
Outperform
42.00
Consensus Rating
–
Buys: 44.7%
–
Holds: 52.6%
–
Sells: 2.6%
Credit Ratings
–
S&P Rating: A-
–
Moody's Rating: A3
–
Fitch Rating: A
12
Recommendation

We recommend that Ithaca College Investment Club purchase 24 shares of Verizon Communications Inc. around $39.42, around
4.5% of our portfolio, and maintain this position for 2-3 years. In the case of major economic downturn or another variable causing
serious change in the stock’s value in the future, we should reevaluate as necessary.
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