Telecommunications Sector

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Telecommunications Sector

• Company Analysis
• Ali, Anshul, Curtis, Dave, Tyler

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Outline

• Recommendation
• Sector Overview
• Stock Overviews

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Economic/Sector Overview

• Economic Phase Soft Landing
• Telecom Sector

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Current
Recommendation

• Overweight Telecom
• Overweight Wireless
• AWE
• Overweight Diversified
• Alltel (AT)
• Verizon (VZ)

• Marketweight Telecom
• Overweight Wireless
• AWE
• Underweight Diversified
• Alltel (AT)
• Verizon (VZ)

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Current SIM Current SP

• Telecom 4.26
• Wireless 0.96
• AWE 0.96
• Diversified 3.3
• Alltel 2.17
• Verizon (VZ) 1.13

• Telecom 3.71
• Wireless 0.44
• AWE 0.22
• NXTL 0.18
• PCS 0.04
• Diversified 3.27
• AT 0.17
• VZ 1.19
• BLS 0.56
• CTN 0.05
• CZN 0.04
• FON 0.12
• Q 0.08
• SBC 0.91
• T 0.15

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Current SIM Current SP

• Telecom 4.26
• Wireless 0.96
• AWE 0.96
• Diversified 3.3
• Alltel 2.17
• Verizon (VZ) 1.13

• Telecom 3.71
• Wireless 0.44
• AWE 0.22
• NXTL 0.18
• PCS 0.04
• Diversified 3.27
• AT 0.17
• VZ 1.19
• BLS 0.56
• CTN 0.05
• CZN 0.04
• FON 0.12
• Q 0.08
• SBC 0.91
• T 0.15

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Suggested SIM Current SP

• Telecom 3.71
• Wireless 0.96
• AWE 0.96
• Diversified 2.75
• Alltel 1.62
• Verizon (VZ) 1.13

• Telecom 3.71
• Wireless 0.44
• AWE 0.22
• NXTL 0.18
• PCS 0.04
• Diversified 3.27
• AT 0.17
• VZ 1.19
• BLS 0.56
• CTN 0.05
• CZN 0.04
• FON 0.12
• Q 0.08
• SBC 0.91
• T 0.15

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Verizon WirelessStock Rating

• Morgan Stanley Overweight
• Prudential Hold
• Argus Research Co. Buy
• Merrill Lynch Neutral
• First Call 2.7
• Ali, Anshul, Hold
• Curtis, Dave, Tyler

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Verizon CommunicationsFinancial Analysis
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Verizon

• Diversified telecommunications company.
• Currently holds greatest weight of telecom firms
  in SP 500.
• 135.8 million access line equivalents and 32.5
  million wireless customers
• Segments include Domestic Telecom (local phone
  services), Domestic Wireless (wireless
  voice/data, paging, equipment sales),
  International (wireline, wireless, other
  investments), and Information Services (domestic
  international publishing e-commerce
  services).

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Verizon CommunicationsWhy Hold?

• Best suited to ride out current market downturn
  due to its mammoth size.
• Proven ability to trim costs.
• Earnings remain strong compared to other telecom
  firms
• Many consider undervalued
• Other news
• Recently began expensing employee stock options.
  Significantly increases pension costs.

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Valuation Analysis
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Alltel Corp. Stock Rating
Prudential Hold SSB In-Line UBS
Warburg Hold Merrill Lynch Neutral Ali, Anshul,
Curtis, Hold Dave, Tyler
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Alltel
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Alltel Corp.Business Analysis

• Local, long distance, wireless, and Internet
  service to 12 mill. customers in 26 states
• Track record of over 250 successful acquisitions.
  Recent two acquisitions added 1.35M customers
• Rev. breakdown wireless 55 wireline 26
  info. svcs. 13 other 6
• Revenues 7,985 mill in 2002
• 1,910 mill in 1Q03 (17 up)

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Alltel

• Recent round of acquisitions should notably push
  up revenues and share net in 2003
• A net addition of 120,000 wireless customers in
  1Q03
• Acquired 589,000 wireline customers in Kentucky
  from VZ
• Well situated for the pull to 2005-2007
• Support by rural territory (high barriers to
  entry)
• Focus on mid-to-small sized metropolitan areas
  (limited competition)
• Cautious in raising spending on advanced
  offerings in wireless sector (not overwhelmed
  with interest requirements)
• Good operating performance by providing
  cross-selling opportunities and cost savings
  (wireless wireline)
• Likely to acquire small regional wireless
  providers and resellers
• Rollout of DSL, an important step in ensuring
  long-term competitiveness of its local business

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Alltel

• Sold Information Services division on 03/31/03.
• Dependable earnings and dividend growth

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Alltel
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Alltel
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Alltel
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ATT WirelessStock Rating

• Prudential Buy
• SSB Outperform/High Risk
• UBS Warburg Buy
• Merrill Lynch Neutral
• Ali, Anshul, Curtis, Hold
• Dave, Tyler

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ATT Wireless
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ATT WirelessBusiness Analysis

• Net addition of 283,000 customers in 1Q03. Total
  customers 21.142 million
• 8-9 growth in customer addition
• Raised rates in February
• Strong 1Q03 results. Revenue up by 11.5 to
  3.743 billion

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ATT WirelessBusiness Analysis

• Risks
• Limited stand-alone operating history.
• Sector risks
• Regulatory risk, financing risk, consolidation
  risk, market-timing risk, competitive risks in a
  rapidly changing industry.

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ATT WirelessFinancial Analysis

• Revenues rising steadily
• Net profit margin and ROE beginning to rise

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ATT WirelessFinancial Analysis

• In best position to improve its free cash flow in
  2003
• Has completed its GSM network.
• Better positioned to control its operating costs.
• Estimated free cash flow of approximately 600
  million
• Profitability and free cash flow important in
  2003

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ATT WirelessFinancial Analysis
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Valuation Analysis
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Current Recommendation

• Overweight Telecom
• Overweight Wireless
• AWE
• Overweight Diversified
• Alltel
• Verizon (VZ)

• Marketweight Telecom
• Overweight Wireless
• AWE
• Underweight Diversified
• Alltel
• Verizon (VZ)

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Questions?