Telecommunications Sector

1
Telecommunications Sector

• Company Analysis
• Cindy Croat
• Philipp Hassanzadeh

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Sector Overview

• Class decision Marketweight sector
• Currently slightly overweight.
• Risky sector, but great upside potential.

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Recommendation
Current Portfolio Weight 4.82
New Portfolio Weight 4.19

• Hold Verizon (VZ) and Alltel (AT).
• Sell SBC (SBC).
• Buy ATT Wireless (AWE).

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Verizon WirelessStock Rating

• Prudential Hold
• UBS Warburg Neutral1
• Merrill Lynch Neutral
• Philipp Cindy Hold

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Verizon WirelessWhy hold?

• Based on 4Q 2002 results, appears best
  positioned as best placed major US telecom
  company to ride out turbulence in sector.
• Continues to take market share.
• Wireless division is best in industry.
• Best job of managing line losses.
• Common brand gives greater marketing leverage.
• Common control of wireless/wireline assets give
  operational flexibility.
• Bundling seems to be working.

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Alltel Corp. Stock Rating

• Prudential Hold
• SSB Outperform, medium risk
• UBS Warburg Hold
• Merrill Lynch Neutral
• Philipp Cindy Hold

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Alltel Corp.Business Analysis

• Local, long distance, wireless, and Internet
  service to 12 mill. customers in 26 states
• Acquisition of Systematics 5/90 Computer Power
  3/92 TDS Healthcare 10/93 360 Comm. 7/98
  Aliant Comm 7/99 Liberty Cell 9/99
• Rev. breakdown wireless 48 wireline 22
  info. svcs. 16 other 14
• Revenues 7,985 mill.

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AlltelWhy hold?

• Recent round of acquisitions should notably push
  up revenues and share net in 2003
• Local phone call business 590,00 access lines
• 760.000 new wireless customer accounts (note)
• 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)

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AlltelWhy hold?

• Boosted net income due to improved management in
  Info. Services
• Dependable earnings and dividend growth make
  timely Alltel stock an appealing 3- to 5-yr
  selection
• Total returns will exceed the industry average
• The issues risk profile is favorable (Safety
  rank, 2)

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ATT WirelessStock Rating

• Prudential Buy
• SSB Outperform/High Risk
• UBS Warburg Buy2
• Merrill Lynch Neutral
• Philipp Cindy Buy

11
ATT WirelessBusiness Analysis

• Net subscriber additions
• Slower subscriber growth, but higher quality
  customers.
• Raised rates in February

12
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
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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
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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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ATT WirelessValuation Analysis
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ATT WirelessValuation Analysis
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SBC Communications Inc.Stock Rating

• Prudential Sell
• UBS Warburg Neutral1
• Merrill Lynch Neutral
• Philipp Cindy Sell

23
SBC Communications Inc. Business Analysis

• Engaged in developing, building and operating
  cellular, telephone and cable television network
  in 13 states
• Acquisitions of PacTel 4/97 SNET 10/99
  Ameritech 10/99
• Rev. breakdown landline local services 42
  network access 19 long distance 6 wireless
  13 other 20
• Revenues 52.200

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SBC Communications Inc.Business Analysis

• Risks Core local telephone business will be
  under pressure throughout 2003
• Further access line losses due to technology
  substitution and increased competition from UNE-P
• Has not yet received regulatory approval to offer
  long-distance in its regional markets (compared
  to Verizon, BellSouth etc.)
• Recently discloses that higher pension/post-retire
  ment costs will likely trim 0.20 to 0.40 from
  share earnings in 2003

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SBC Communications Inc.Business Analysis

• Opportunities The company continues to
  streamline its cost structure
• Aggressively reins costs, mainly via facility
  consolidation and headcount reductions
• But benefits will likely be offset by in the next
  terms by the uptstick in pension expenses

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SBC Communications Inc.Financial Analysis

• Declining revenues, EPS and ROE
• Large negative net working capital and high
  interest burden
• Very small long term/total Equity/Debt ratios
• DuPont Analysis
• Decreasing asset turnover, leverage and ROE

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SBC Communications IncFinancial Analysis
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SBC Communication Inc.Valuation Analysis

• PE, P/S, P/B and P/CF
• Continuing downtrend
• Large Variation

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Recommendation
Current Portfolio Weight 4.82
New Portfolio Weight 4.19

• Hold Verizon (VZ) and Alltel (AT).
• Sell SBC (SBC).
• Buy ATT Wireless (AWE).

Philipp-Do you think we should review the
positives and negatives of each stock again? One
group did, but Im not sure that its necessary.