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Buy Presentation: Verizon Communications Inc.

Buy Presentation: Verizon Communications Inc. Presentation Prepared By: Colton Shoenberger, Matthew McLaughlin, Matthew Rich, and Henry Apostoleris. March 27, 2012. Investment Thesis. Thesis. Stock Price (One Year).

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Buy Presentation: Verizon Communications Inc.

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  1. Buy Presentation: Verizon Communications Inc. Presentation Prepared By: Colton Shoenberger, Matthew McLaughlin, Matthew Rich, and Henry Apostoleris March 27, 2012

  2. Investment Thesis Thesis Stock Price (One Year) 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 well-diversified 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. Revenue 2007-2011

  3. 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

  4. Company Overview and Operations Company Overview Revenue Stream Breakdown 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 Wireless Breakdown

  5. 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) • FreedomPopplans 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)

  6. Valuation Comparable

  7. Operating Comparable

  8. Sector Ratio Analysis Valuation Ratios Financial Strength Profitability Efficiency Price to Sales Verizon: 1.01 Sector: 1.23 Price to Cash flow Verizon: 4.18 Sector: 8.01 Current Ratio Verizon: 1.01 Sector: 1.41 Interest Coverage (TTM) Verizon: 7.64 Sector: 0.11 Operating Margin (TTM) Verizon: 11.62 Sector: 14.30 Net Profit Margin (TTM) Verizon: 9.20 Sector: 7.99 Receivable Turnover Verizon: 9.41 Sector: 6.13 Inventory Turnover Verizon: 44.30 Sector: 31.33

  9. Competitors AT&T (T) Sprint (S) 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) 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

  10. Competitors Deutsche Telekom (T-Mobile; DTEGY) MetroPCS (PCS) LEAP Wireless (LEAP) U.S. Cellular (USM) Strengths Recent joint venture with France Telecom (FTE) in UK Weaknesses Low margins, especially in the U.S. Recently cut jobs and call centers Strengths Record level of subscriber additions, revenue, and adjusted EBITDA in 2011faciliated by postpaid to prepaid trend 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 Strengths Upgrading its smartphone lineup, leading to higher ARPU and lower churn  Weaknesses Multiyear low margins will make 4G build out difficult as competition intensifies; strains on company profitability Rejected merger offer from MetroPCS in 2007 suggests management more interested in building a company than maximizing shareholder value 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

  11. SWOT Analysis Strengths Weaknesses Opportunities Threats Considerable dividend, good returns and profit margins Industry-low churn rates (customer loyalty) Industry-high network and product quality (smartphone and data availability) Strong economic moat (ability to purchase spectrum) Has a customer base of 49.3 million in the U.S. alone, gained 2 million postpaid subscribers in 2011 Brand name Near 52 week high Need to make heavy investments on spectrum to prevent competition and encourage 4G and heavy data plans Upgrading fixed-line network despite declining demand Lack of customer care centers compared to competitors Increase in demand for 4G LTE technology will pull strong profit margins along with easing network quality with customers split between 3G and 4G phones iPhone 5 and new iPad will use LTE technology AT&T rising prices on unlimited plan and removing unlimited data plan Foreign opportunities to expand business into Canada, Asia and some parts of Europe Expansion on audio conferencing services (VoIP) Potential FCC regulation on spectrum auctioning would help minority mobile companies compete with Verizon’s network quality Economic downturn could push consumers away from Verizon’s postpaid plans, stifle 4g LTE adoption, and push customers toward cheaper pre-paid options from MetroPCS or LEAP

  12. Analyst Recommendations • Analyst Recommendations and Fair Value Estimates • Consensus Rating • Buys: 44.7% • Holds: 52.6% • Sells: 2.6% • Credit Ratings • S&P Rating: A- • Moody's Rating: A3 • Fitch Rating: A

  13. 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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