Telecom Sector SP50

1
Telecom Sector (SP-50)

• August 2007

• George Andress
• Brandi Bennington

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Agenda

• Recap of Sector Presentation
• Sprint (S)
• Metro PCS (PCS)
• Recommendation

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Sector Weights-SIM portfolio
4
Sector Weight- SP 500
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Size and Composition

• Telecom sector composition

Current SIM Holdings
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Sector Decision and Reasoning

• Defensive Sector
• Cheap sector relative to the SP 500
• Trending toward consolidation
• Opportunities in new technologies
• Opportunities in international growth

• Increase overweight in SIM portfolio by 100 basis
  points
• Results in a total overweight to the Telecom
  Sector of 2.01

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Recommended Actions

• Hold America Movil
• Sell Sprint Nextel
• Buy Metro PCS

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Sprint Nextel
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Sprint Nextel-SELL

• Growth Prospects
• WiMax-high-speed broadband service over large
  areas
• Possible buy-out or merger candidate
• Risk/Concerns
• Unable to recognize benefit of merger with Nextel
• Lower APRU and higher Churn
• Qualcomm Chips
• Loss of customers due to increased technology
• Poor Customer Service

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Sprint-Valuation
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Valuation

• Current Price-19.49
• DCF- 16.66
• Valuation- 15.35
• Average Price-16.00
• Overvalued by 18

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Metro PCS Communications
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Metro PCS Communications

• Supply wireless service on a no contract basis
• Cheap, easy, no-frills service (Plans start at
  30,range to 50 for long-distance, internet, and
  text messaging
• Prepaid plan that minimizes credit risk to Metro
  PCS
• Provides unlimited calls within the local calling
  area
• Set to compete with local wireline on a wireless
  network
• Limited handset subsidies
• Target large metro areas

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Metro PCS-BUY

• Growth Prospects
• Launching into Los Angeles market by the end of
  the third quarter
• Expects to enter Las Vegas, Philadelphia, Boston,
  and New York in future
• Cheap and easy for young, poor, and irresponsible
  
• Speculation of merger with Leap in long-term
  future

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Metro PCS-BUY

• Risks/Concerns
• Downturn in the market could result in low
  subscriber additions and high churn
• Inability to maintain low operating expenses
• Increased competition from top 3 wireless
  providers
• Ability to grow and maintain infrastructure to
  attract new markets

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Valuation

• Current Price-28.00
• DCF-45.86
• Absolute valuation-29.17
• Dividend Discount Model-40.56
• Average Price-38.53
• Undervalued by 37

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Metro PCS Valuation
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Recommendation

• Sell 100 of Sprint-84 basis points
• Buy 184 basis points of Metro PCS

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Questions ?