Jan 18, 2012 - AT&T (Legacy BellSouth States): Rate of Access ..... EBITDA multiple of 6.25x for the core cable dist
January 18, 2012
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
The State of the Net: 2012 Washington, DC January 18, 2012
Craig Moffett • Senior Analyst • +1-212-969-6758 •
[email protected]
See Disclosure Appendix of this report for important Disclosures and Analyst Certifications
The State of the Infrastructure
Internet in America: What the Data Says Competitive dynamics The TelCo Dilemma
Returns on Capital
2
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
3
100,000
70%
60%
50%
40%
30%
10,000
0
Penetration of Households
77,455
76,740
76,182
74,700
73,748
72,906
72,496
71,039
69,927
68,884
68,220
66,516
65,456
Penetration
Q3 2011
Q2 2011
Q1 2011
Q4 2010
Q3 2010
Q2 2010
Q1 2010
Q4 2009
Q3 2009
Q2 2009
Q1 2009
Q4 2008
Q3 2008
64,071
63,118
80,000
Q2 2008
60,661
58,909
56,819
Satellite BB
Q1 2008
Q4 2007
Q3 2007
Q2 2007
55,157
52,253
70,000
Q1 2007
49,826
46,987
44,947
Fiber
Q4 2006
Q3 2006
Q2 2006
60,000
Q1 2006
42,031
39,406
36,839
DSL
Q4 2005
Q3 2005
Q2 2005
35,194
50,000
Q1 2005
32,642
30,466
28,215
26,338
24,080
Cable
Q4 2004
Q3 2004
Q2 2004
Q1 2004
40,000
Q4 2003
22,039
19,978
90,000
Q3 2003
20,000 18,477
30,000
Q2 2003
Q1 2003
Subscribers (000s)
Penetrations Gains are Slowing at ~66% of the Market Broadband Penetration and Delivery Technology 100%
90%
80%
20%
10% 0%
Source: Company reports, Kagan, Bernstein estimates and analysis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Incremental penetration dynamics suggest we are headed to ~85%
Penetration
Change in Penetration 1,000 65.5%
800
860.0
500
537.0
620.5
Basis Points
734.0
733.5
600
759.8
400
273.0
297.9
200
358.0
YoY Basis Point Change in U.S. Broadband Penetration
300
100
Source: Company Reports, Bernstein Estimates and Analysis
Q3 2011
Q1 2011
Q3 2010
Q1 2010
Q3 2009
Q1 2009
Q3 2008
Q1 2008
Q3 2007
Q1 2007
Q3 2006
Q1 2006
Q3 2005
Q1 2005
Q3 2004
Q1 2004
0 Q3 2003
Q1 2002 Q3 2002 Q1 2003 Q3 2003 Q1 2004 Q3 2004 Q1 2005 Q3 2005 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011
0%
Q1 2003
59.8%
50.8%
19.9%
10%
27.3%
20%
34.6%
30%
900
700
43.2%
40%
56.2%
50%
62.7%
60%
13.7%
Broadband Penetration of U.S. Households
70%
Source: Company Reports, Bernstein Estimates and Analysis
4
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Reasons for Not Having Broadband Reasons for Not Having Broadband 2010 (OBI)
Reasons for Not Having Broadband 2010 (OBI)
Reasons for Not Having Broadband 2011 (NTIA) Use internet somewhere else, 5%
Combo, 4% Use highspeed at work, 3%
Reasons for Not Having Broadband 2011 (NTIA)
Other, 11%
Other, 7% Cost, 25%
Cost, 36% Relevance, 19%
Relevance, 46%
Digital Literacy, 22% Lack of Availability, 5% Source: FCC, "Broadband Adoption and Use in America, OBI Working Paper Series No. 1." John B. Horrigan, Ph.D
Digital Literacy, 14%
Lack of availability, 3%
Source: "Exploring the Digital Nation - Computer and Internet Use at Home," U.S. Dept of Commerce
5
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
6 Q3 2011
Q2 2011
Q1 2011
Q4 2010
Q3 2010
Q2 2010
Q1 2010
Q4 2009
Q3 2009
Q2 2009
(234)
(205)
(64)
(136)
(256)
(404)
(11) (111)
(229)
(199)
(12)
(71)
151
2%
Q1 2009
Q4 2008
Q3 2008
-3% (186)
-2%
Q2 2008
Q1 2008
Q4 2007
Q3 2007
686
1,143
1,044
1,083
Subscriber Growth Rate 1,250
6% 1,000
750
3% 500
250
0% 0
-5% Subscribers Gains (Losses) (000s)
470
695
552
5%
Q2 2007
Q1 2007
Q4 2006
Q3 2006
8% 979
9%
1,411
11%
Q2 2006
Q1 2006
Subscriber Growth Rate
DSL is now in decline
DSL Net Additions (Losses) Subscriber Gains (Losses) 1,750
1,500
(250)
(500)
(750)
Source: Bernstein Analysis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
FiOS: Nearing End of Growth Cycle
FiOS: Projected Video Subscribers and Subscriber Growth 4,500
2,000
0.3%
1.4%
4.1%
50%
2015E
2014E
2013E
0% 2006
2015E
2014E
2013E
2012E
2011E
2010
2009
2008
2007
500
100% 7.5%
1,000
100
2006
150%
1,500
2012E
200
200%
13.5%
300
2,500
2011E
400
250%
27.9%
500
300%
3,000
2010
600
3,500
49.2%
700
4,000
2009
FiOS Video Subscribers* (000s)
800
350% YoY % Subscriber Growth
103.4%
Estimated*
355.6%
900
400%
Estimated*
2008
Actual
FiOS Video Net Additions* (000s)
Actual
5,000
1,000
2007
FiOS: Projected Video Net Additions
*estimated based on market penetration curve estimated from 1Q 2006-3Q 20011results; assumes 18M home passings by end of 2015 and that marketed video homes/passed homes = 90% by end of 2015 Source: Company Reports, Bernstein Estimates and Analysis
*estimated based on market penetration curve estimated from 1Q 2006-3Q 2011 results; assumes 18M home passings by end of 2015 and that marketed video homes/passed homes = 90% by end of 2015 Source: Company Reports, Bernstein Estimates and Analysis
7
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
U-Verse: Nearing End of Growth Cycle
U-Verse: Projected Video Net Additions
U-Verse: Projected Video Subscribers and Subscriber Growth Actual
7,000
1,200
150%
7.9%
11.0%
1,000
100% 13.7%
2,000
20.7%
200
200%
3,000
27.5%
400
250% 4,000
44.6%
600
300%
97.5%
U-Verse Video Subscribers* (000s)
800
5,000
350%
Subscriber Growth
352.4%
6,000
Estimated* 1,000
2015E
2014E
2013E
2012E
2011E
2010
2007
2015E
2014E
2013E
2012E
2011E
2010
2009
2008
2007
50% 0%
2009
-
-
2008
U-Verse Video Net Additions* (000s)
400%
Estimated* YoY %
Actual
*estimated based on market penetration curve estimated from 1Q 2007-3Q 2011 results; assumes 33M home passings by end of 2015 and that marketed homes/passed homes = 85% by end of 2014 Source: Company Reports, Bernstein Estimates and Analysis
*estimated based on market penetration curve estimated from 1Q 2007-3Q 2011 results; assumes 33M home passings by end of 2015 and that marketed homes/passed homes = 85% by end of 2014 Source: Company Reports, Bernstein Estimates and Analysis
8
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
The Need for Speed Actual (Realized) Broadband Speeds by Technology 9
Actual Download Speed (Mbps)
8
7.7
7.7 Average
7 6
5.5
Median
5.1
5 4 3 2
1.6
2 1 0 Fiber
Cable
DSL
Source: FCC, "Broadband Performance: OBI Technical Paper No. 4"
9
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Cable is Pulling Away in the Broadband Market
Share of Broadband Net Additions
10
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
FiOS and U-Verse Are Only a Small Slice of the National Broadband Market
Broadband: Market Share (Q4 2010)
Broadband: Market Share (Q4 2011E) Other Fiber, 1.4%
Other Fiber, 1.0%
U-Verse, 4.0%
U-Verse, 4.9%
FiOS, 5.5%
FiOS, 6.1%
DSL , 27.3%
DSL, 29.9% Cable, 59.5%
Cable, 60.4%
Source: Company reports, Bernstein analysis
11
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
FCC: “Only One Technology Meets the Demands of a 25Mbps Enduser” Cable, Fiber and/or DSL Cable Only Not Served 14-16%
14-16%
23-27%
23-27%
14-16%
78-82% 51-57%
2-4% 1 Mbps
51-57%
3-9% 3-9% 10 Mbps 25 Mbps Downstream bandwidth supported
Sources: The FCC; 2009 Form 477 data; service provider, equipment manufacturer, and trade association filings and publications; analyst
12
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
The TelCo Dilemma: Residential Access Lines Are in Free Fall
12.5%
y = -2.3043x + 196.14 R² = 0.9826
200
10.0%
150
7.5%
100
5.0%
50
2.5%
0
0.0%
Industry Total Access Line Loss Rate
250
Q4 2000 Q2 2001 Q4 2001 Q2 2002 Q4 2002 Q2 2003 Q4 2003 Q2 2004 Q4 2004 Q2 2005 Q4 2005 Q2 2006 Q4 2006 Q2 2007 Q4 2007 Q2 2008 Q4 2008 Q2 2009 Q4 2009 Q2 2010 Q4 2010
Industry Total Access Lines in Service (Millions)
U.S. Access Lines in Service
Total access lines
Total access lines loss rate
Source: Company reports, Bernstein estimates and analysis
13
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
As Access Line Losses Mount, Unit Costs are Soaring
25% y = -1.2793x - 0.0363 20% 2 R = 0.5601 15% 10% 5% 0% -5% -10% -15% 5%
0%
Verizon (Legacy GTE States): Rate of Access Line Loss Versus CAGR in Cost per Line (Individual Years by State, 2004-07) Annual Change in Cost per Access Line
Annual Change in Cost per Access Line
Verizon (Legacy Bell States): Rate of Access Line Loss Versus CAGR in Cost per Line (Individual Years by State, 2004-07)
-5%
-10%
-15%
30% 25% 20% 15% 10% 5% 0% -5% -10% -15%
-20%
y = -1.2284x - 0.0501 2
R = 0.5216
5%
Annual Change in Access Lines
15% 10% 5% C
0% -5% -10% 5%
0%
-5%
-10%
-15%
-10%
-15%
-20%
AT&T (Legacy BellSouth States): Rate of Access Line Loss Versus CAGR in Cost per Line (Individual Years by State, 2003-06) Annual Change in Cost per Access Line
Annual Change in Cost per Access Line
y = -1.2179x - 0.0078 R2 = 0.5867
20%
-5%
Annual Change in Access Lines
AT&T (Legacy SBC States): Rate of Access Line Loss Versus CAGR in Cost per Line (Individual Years by State, 2003-07) 25%
0%
-20%
30%
y = -1.5209x - 0.0125 2 R = 0.4658
20% 10% 0% -10% -20% 0%
-5%
-10%
-15%
Annual Change in Access Lines
Annual Change in Access Lines Source: FCC and Bernstein estimates and analysis
14
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
15
24.8%
23.9%
23.6% 23.8%
2Q 2011
18%
1Q 2011
Verizon
23.5%
22%
4Q 2010
22.7%
24%
3Q 2010
2Q 2010
1Q 2010
25.5%
26.2%
26.9%
24.8%
26%
4Q 2009
3Q 2009
2Q 2009
AT&T
1Q 2009
28%
26.2%
28.0%
28.1%
27.8%
35.9%
35.3%
33.9%
35.7%
33.7%
35.1%
34.9%
33.6%
33.5%
33.5%
32.1%
33.1%
33.4%
33.4%
33.9%
32.6%
32.3%
31.3%
29.4%
34%
4Q 2008
20%
3Q 2008
2Q 2008
1Q 2008
4Q 2007
32%
28.2%
27.7%
36%
3Q 2007
30%
28.0%
38%
2Q 2007
1Q 2007
Wireline EBITDA Margin
As Volumes Fall, Wireline Margins Are Deteriorating
Verizon and AT&T: Wireline Margins
Source: Bernstein Estimates and Analysis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
A Decade of ROIC (I)… Anemic Returns on Net PP&E A Decade of Economic Value Added (Excluding Unusuals, Goodwill, and ARILI)
Weighted Average ROIC Ex-Unusuals, Goodwill, ARILI Minus WACC, 2000-09
8.0% EP = Economic profits IC = Invested capital
Satellite (EP = +$4.7 billion)
6.0%
IC = $8.5, ROIC spread 5.5% Cable (EP = +$11.8 billlion)
4.0%
IC = $32.0, ROIC spread 2.5% Wireless (EP = +$3.2 billion) IC = $129.4, ROIC spread = 0.3%
2.0%
Wireline (EP = +$22.4 billion) IC = $146.4, ROIC spread 1.5%
0.0%
-2.0% Pre-Paid Wireless (EP = -3.3 billion)
-4.0%
IC = $4.6, ROIC spread = -7.1% -6.0%
-8.0% 0
25
50
75
100
125
150
175
200
225
250
275
300
Average Invested Capital Excluding Goodwill and ARILI, 2000-09 ($ billion)
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
16
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
A Decade of ROIC (II)… and even worse returns when you include what was actually paid for the assets
A Decade of Economic Value Added (including Unusuals, Goodwill, and ARILI)
Weighted Average ROIC Includng Unusuals, Goodwill, ARILI Minus WACC, 2000-09
1.0%
Satellite (EP = -$2.8 billion)
EP = Economic profits IC = Invested capital
IC = $13.8, ROIC spread -2.1%
0.0% Wireline (EP = -$48.3 billion)
-1.0%
Wireless (EP = -$63.8 billion) IC = $231.9, ROIC spread = -2.1%
-2.0%
IC = $210.9, ROIC spread = -3.0%
-3.0%
Cable (EP = -$61.9 billion) IC = $126.8, ROIC spread -4.9%
-4.0%
Pre-Paid Wireless (EP = -3.3 billion)
-5.0%
IC = $4.8, ROIC spread = -5.9%
-6.0%
-7.0% 0
25
50
75
100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500 525 550 575 Average Invested Capital Including Goodwill and ARILI, 2000-09 ($ billion)
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
17
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Wireline Telecom ROIC now mostly below the cost of capital… wireless is a mixed bag, with clear winners and losers
Wireline ROICs excluding Unusuals, Goodwill and ARILI, 2000 to 2010
Wireless ROICs excluding Unusuals, Goodwill and ARILI, 2000 to 2010
16%
16% 14% ROIC Excluding Unusuals, Goodwill, and ARILI
ROIC Excluding Unusuals, Goodwill, and ARILI
14%
12%
10%
8%
7.2%
6%
4% AT&T BellSouth Verizon
2%
15.4%
AT&T Sprint T-Mobile Verizon
12.6%
12% 10% 8% 7.3%
6% 4% 2%
0.4%
0% -2%
1.6% 2010
2009
2008
2007
2006
2005
2004
2003
2002
2000
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
2001
-4%
0%
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
18
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Cable and Satellite sub-sectors show strongly rising ROIC
Cable ROICs excluding Unusuals, Goodwill and ARILI, 2000 to 2010
40%
46.7%
50%
Cablevision Charter Comcast TWC Cablevision ex-MSG
30%
25.6%
20%
19.0% 24.1%
ROIC Excluding Unusuals, Goodwill, and ARILI
18.2% 10%
0%
-10%
DirecTV
40%
44.3%
Dish Network 30%
20%
10%
0%
-10%
2010
2009
2008
2007
2006
2005
2004
2003
2002
2000
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-20% 2001
ROIC Excluding Unusuals, Goodwill, and ARILI
50%
Satellite ROICs excluding Unusuals, Goodwill and ARILI, 2000 to 2010
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
19
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
A Decade of Stock Performance… poor ROIC translates into poor total shareholder returns
A Decade of Investment Returns: Cumulative Total Stock Performance (Absolute) Ten-Year Total Stock Returns (YE 1999 to YE 2009) Eight-Year Total Stock Returns (YE 2001 to YE 2009)
115.9%
100%
Two-Year Total Stock Returns (YE 2007 to YE 2009) 44.2%
75%
0.7%
0.3%
25%
S&P 500 Eight-Year Total Stock Return +13.5%
4.2%
8.0%
50%
AT&T
Cablevision
Charter
Comcast
DirecTV
Dish Network
MetroPCS
-94.1%
Sprint
-17.0%
-24.5%
-20.4% Leap
-72.1%
-100%
-76.9%
-60.8%
-62.4%
-35.0%
S&P 500 Two-Year Total Stock Return -20.3%
-50.5%
-5.3%
-28.4%
-46.4%
-97.3%
-99.8%
-29.9%
-99.9%
-75%
-50.6%
-50%
-26.9%
-25%
-0.6%
0%
-21.6%
Total Absolute Return for Period Ended Dec 31, 2009
125%
S&P 500 Ten-Year Total Stock Return -9.1% Time Warner Cable
Verizon
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
20
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
ROIC is now much better (than historical) for cable, and worse for telecom
ROIC Excluding Unusuals, Goodwill and ARILI Minus WACC, 2010 Satellite
Cable
40.0%
35.6%
37.7%
35.0% 30.0% 25.0% 20.0%
15.8%
17.8%
16.4%
15.0%
11.3%
10.3%
10.0% 5.0%
2.9%
0.0% -0.2%
-5.0% -10.0%
-0.4%
-1.6% -7.4%
-7.4%
Dish Network
DirecTV
Time Warner Cable
Comcast
Charter
Cablevision ex-MSG
Cablevision
MetroPCS
Leap
T-Mobile
Sprint
Verizon
-15.0%
AT&T
ROIC Ex-Unusuals, Goodwill, and ARILI Minus WACC
Telecommunications
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
21
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Decomposing ROIC (II) into Asset Turnover and Margins (subsectors) Changes in IC Turnover excluding Goodwill and ARILI and NOPLAT Margin excluding Unusuals Combinations by Industry, 2006 to 2010 NOPLAT margin x IC turnover = ROIC 4.5 '10, 45.1%
4.0
IC Turnover (Ex-Goodwill and ARILI)
Satellite 3.5 3.0
'06, 28.7%
35%
2.5 Cable 2.0
25%
'06, 14.1%
1.5 1.0
30%
'10, 22.7%
'10, 4.4%
20%
'06, 9.3%
Wireline
Wireless
'10, 5.0%
'10, 10.7% 10%
0.5
5%
'06, 7.5% '06, 4.4%
0.0 5%
6%
7%
8%
15%
Pre-paid wireless
9% 10% 11% 12% NOPLAT Margin (Ex-Special Items)
13%
14%
15%
16%
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
22
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Decomposing ROIC (I) into Asset Turnover and Margins (companies) IC Turnover excluding Goodwill and ARILI and NOPLAT Margin excluding Unusuals Combinations by Company, 2010 5%
10%
15%
20%
25%
30%
35%
40%
45%
NOPLAT margin x IC turnover = ROIC
4.5 DTV
IC Turnover (2010, Ex-Goodwill and ARILI)
4.0
Satellite
DISH 3.5 Cable
3.0 2.5
CMCSA
Wireline
2.0
Wireless TWC
CHTR
1.5
CVC
T
1.0
VZ S
T
VZ
18%
20%
T-Mo PCS
0.5 LEAP 0.0 0%
2%
4%
6%
8%
10%
12%
14%
16%
22%
NOPLAT Margin (2010, Ex-Special Items) Source: Capital IQ, corporate reports and Bernstein estimates and analysis
23
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Summary and Conclusions
Penetration is slowing… but the data suggests we’re far from done yet Fiber deployments near the end Telco share falling… …and TelCo wireline economics are deteriorating Cable is winning the broadband wars Infrastructure returns are anemic – across the board
24
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Disclosure Appendix
25
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
U.S. Telecommunications and Cable & Satellite: Coverage Universe
Stock
Rating
Target Price
Closing Price (01-13-12)
Stock
Rating
Target Price
Closing Price (01-13-12)
VZ T S LEAP PCS
U M M O O
$32.00 $30.00 $2.50 $12.00 $13.00
$38.92 $30.07 $2.31 $9.96 $8.35
CMCSA TWC CVC DISH DTV
O O M M O
$32.00 $88.00 $20.00 $28.00 $52.00
$25.38 $65.43 $13.97 $28.75 $43.46
Source: Bloomberg, Bernstein estimates and analysis
26
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Valuation Methodology We value AT&T and Verizon on a combination of P/FE and a sum of the parts analysis. Assigned multiples are based on historical performance, colored by the company's current allocation of capital. We value AT&T on a combination of a target P/FE multiple of 13.0x applied to our estimated forward earnings, as adjusted, and a sum of the parts analysis which yields a warranted blended EV/EBITDA multiple of 5.6x after adjusting for postretirement liabilities. We add the probability-weighted expected value associated with the proposed acquisition of T-Mobile USA. We value Verizon on a combination of a target P/FE multiple of 13.0x applied to our estimated earnings, as adjusted, and a sum of the parts analysis which yields a warranted blended EV/EBITDA multiple of 5.7x after adjusting for postretirement liabilities. We value Sprint using EV/EBITDA multiples of 5.5x forward 12 month EBITDA for the wireless business (proportionately consolidating their 54% stake in Clearwire) and 3.5x for the wireline business, adjusted for other non-operating assets and liabilities. We value Leap Wireless and MetroPCS based on a weighted average of derived DCF values under four different scenarios – a base case (which is given a 50% weight in the target price derivation), high and low scenarios (weighted at 15% each), and a realistic downside scenario (weighted at 20%). Our base case scenario assumes that Leap and MetroPCS' unlimited pre-paid ARPU remains in the $38-$39 range through 2015 and that their penetration of covered POPs reaches 7.2% and 9.5%, respectively, with the high and low scenarios respectively incorporating more optimistic and pessimistic assumptions for ARPU, subscriber growth, CPGA, CPU and capex. We value the DBS sector on the basis of Steady State Cash Flow (SSCF) multiples, adjusted for market value estimates for non-DBS assets. SSCF multiples have historically clustered around 9-11x trailing SSCF for DirecTV and Dish Network, with higher multiples reflecting higher growth expectations, and lower multiples reflecting lower growth expectations. We currently apply a 7.5x SSCF multiple to our forecast forward 12 month SSCF for DirecTV and a 6.0x multiple for Dish Network, reflecting a 12 month look forward as the basis of our 12 month target price, and lower-than-historical SSCF multiples to reflect the sector's and the companies' diminished longer term growth prospects. We value the company's Latin American assets using a forward SSCF multiple of 6.5x for PanAmericana and Sky Brazil, and a 10.0x trailing EBITDA multiple for Sky Mexico. 27
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Valuation Methodology, continued We value Comcast on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast EBITDA multiple of 6.25x for the core cable distribution business, 8.0x forward EV/ EBITDA for the cable networks businesses of Comcast and NBCU, and 6.0x forward EV/EBITDA for NBCU's broadcast business. We value other consolidated and non-consolidated operations and non-public equity investments on various bases as appropriate. Publicly traded investments are carried at current market value. In order to derive our price target for Time Warner Cable, we use a target multiple of 6.5x forward 12 month forecast EBITDA, and add back the NPV of Time Warner Cable's deferred tax asset. We estimate that Time Warner Cable will realize approximately $330 million of tax savings per year for fifteen consecutive years from the 2006 acquisition of Adelphia as a result of its step-up in basis. When calculating the net present value of these tax shields, we apply an 7.50% discount rate, which corresponds to Time Warner Cable's estimated weighted average cost of capital. We value Cablevision on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast EBITDA multiple of 7.0x for the core cable business. We value other assets and liabilities on various bases as appropriate.
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Risks The risks to our target price for AT&T include: Failure to gain regulatory approval to close the proposed T-Mobile USA transaction, adverse financial or other consequences associated with any conditions required to garner regulatory approval, or the inability to wring the expected synergies out of a combined entity. A steeper, or more sudden, deceleration in wireless subscriber growth – as a consequence of wireless saturation or economic weakness – would lead to sharply slower growth, and would likely be met with severe multiple contraction, in our view. Faster-than-anticipated penetration of the Small and Medium Business market by the MSOs would undermine revenue and EBITDA recovery in the Enterprise segment. Additional spending on fiber expansion (FTTX) projects, or acquisitions targeting the Consumer Wireline segment (including purchasing a Satellite Pay TV provider) would yield lower ROIC and consequent multiple contraction. Overpayment in an acquisition, which could be a variety of potential targets. Our target price for Verizon is below the current trading range. Upside risks to our target price include: Lower-than-expected inflationary pressures in the macro-economy, which could result in generally lower interest rate expectations, and consequently, make current dividend yields more attractive relative to investment alternatives. Faster growth in wireless subscribers than we anticipate, which could be a result of stronger economic growth, increased market share for Verizon, or higher terminal wireless market penetration than we forecast. Slower-than-anticipated penetration of the Small and Medium Business market by the MSOs would help to preserve revenue and foster an EBITDA recovery in the Enterprise segment. Subscriber gains as a result of fiber expansion (FTTX) projects could be greater than we forecast, yielding a higher ROIC and possible multiple expansion. Access line and DSL losses in the TelCo segment could be less severe than we forecast, leading to better than expected revenues and margins. A faster-than-expected recovery in Enterprise revenues and margins. Acquisition of Vodafone's 45% stake in Verizon Wireless at an attractive price would be accretive to value and would remove a significant overhang from the shares. Our target price for Sprint is below the current trading range. Upside risks to our Sprint target price include the following: A potential regulatory rejection of the AT&T and T-Mobile merger, which would give Sprint more leverage to strike a replacement deal with T-Mobile. A spin off of Nextel could results in improved operating metrics, or, alternatively, could fuel investor enthusiasm even in the absence of improvement. The growth rate of the industry could prove stronger than we anticipate. Sprint's churn rate or share of gross additions could improve sooner or more meaningfully than we anticipate. The downside risks facing our target prices for Leap Wireless and MetroPCS include the following: Irrational pre-paid price competition initiated by one of the major carriers – most likely Sprint and/or T-Mobile, who are losing post-paid subscribers irrespective of their efforts on the pre-paid side and thus are not as concerned about cannibalization between pre-paid and post-paid. More limited than expected ability to penetrate their respective markets due to intensified pre-paid competition and/or economic forces, which could compromise their scale economies and overall cost structure. Greater than expected data consumption among pre-paid subscribers, which in turn could drive higher than expected capex requirements. Downside risks specific to Leap include the possibility its new initiatives, including its new MVNO relationship with Sprint and nationwide 3G data roaming offer, raise its cost structure beyond expectations. Downside risks specific to MetroPCS include a greater-than-expected negative impact from Leap eventually selling its services in MetroPCS' footprint under its MVNO agreement with Sprint. Upside risks to our target prices for MetroPCS and LEAP include the following: Greater than expected growth in the pre-paid wireless market overall, due to more post-paid wireless subscribers migrating to unlimited pre-paid Greater than expected uptake of higher priced service offerings, which could result in enhanced profitability. More rational price activity in the pre-paid market
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Risks, continued Upside risks to our target price for Dish Network include: Faster-than-expected subscriber growth would likely yield multiple expansion, almost irrespective of economic cost. A stronger-than-expected economic recovery could result in renewed demand for premium services, providing upside to ARPU. An acquisition of DirecTV by AT&T or Verizon, which has been the subject of speculation for years, if it were to occur, would likely create perceived "scarcity value," and would raise valuation multiples for Dish Network. Potential value creation resulting from Dish's recently acquired assets, namely their spectrum holdings and Blockbuster. Downside risks to our target price for Dish Network include: Slower-than-expected subscriber growth would likely yield multiple contraction. A weaker-than-expected economic recovery could result in reduced demand for premium services, providing downside to ARPU. A premium of some amount is likely baked into Dish's share price based on the widely-held expectation that an acquisition by AT&T or Verizon is likely. A change in these expectations could result in multiple contractions. Attempts to build a terrestrial network based on the company's spectrum holdings would likely be a value destructive activity, and attempts to turnaround Blockbuster may also yield negative returns. An unfavorable resolution to Dish's litigation with AMC Networks and Cablevision with regards to VOOM could be material. Risks to our price targets for the Cable operators include the risk that the competitive pricing environment will be more aggressive than we expect. Notwithstanding our analysis of rational pricing strategies, players may adopt irrational pricing behavior. Alternatively, mere expectations of a more challenging pricing environment, even in the absence of evidence of price competition, may continue to weigh on the stocks for some time. New pathways to the home for video or other entertainment could also reduce the value of cable's video distribution bottleneck. Deep fiber deployments by the RBOCs will impact cable subscribers and revenue growth rates, and could occur more quickly, or have a more significant pricing impact, than we have forecast. Comcast Video pricing could come under pressure as growth for the satellite operators and TelCos slows. The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. Longer term, cable's advantaged position in broadband could result in regulation. Time Warner Cable Video pricing could come under pressure as growth for the satellite operators and TelCos slows. The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. Longer term, cable's advantaged position in broadband could result in regulation. Cablevision Cablevision has a history of erratic corporate governance. A return of cash to shareholders cannot be assured. Cablevision faces a very substantial overlap with Verizon's FiOS that could result in greater share loss or lower prices than anticipated. The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. Longer term, cable's advantaged position in broadband could result in regulation.
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Disclosure Appendix SRO REQUIRED DISCLOSURES References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and Sanford C. Bernstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, collectively. Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues. Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise specified. We have three categories of ratings:
Outperform: Stock will outpace the market index by more than 15 pp in the year ahead. Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead. Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead. Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily. As of 01/17/2012, Bernstein's ratings were distributed as follows: Outperform - 45.1% (1.4% banking clients) ; Market-Perform - 46.0% (0.5% banking clients); Underperform - 8.9% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months. Bernstein currently makes a market in the following companies DISH / DISH Network Corp, DTV / DIRECTV Group Inc, CMCSA / Comcast Corp. The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-securities related services and received compensation for such services VZ / Verizon, T / AT&T Inc, S / Sprint Nextel Corp, TWC / Time Warner Cable Inc. An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies VZ / Verizon, T / AT&T Inc, CVC / Cablevision Systems Corp, TWC / Time Warner Cable Inc. This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you can also write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB, United Kingdom; or Sanford C. Bernstein (Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong, or Sanford C. Bernstein (business registration number 53193989L) , a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, Director of Compliance, 30 Cecil Street, #28-01 Prudential Tower, Singapore 049712.
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12-Month Rating History as of 01/16/2012 Ticker Rating Changes CMCSA CVC DISH DTV LEAP PCS S T TWC VZ
O (RC) 12/14/10 M (RC) 05/10/10 M (RC) 10/10/08 O (RC) 01/11/12 O (RC) 09/28/11 O (RC) 08/10/11 M (RC) 09/19/11 M (RC) 10/25/11 O (RC) 11/02/10 U (RC) 10/12/10
M (RC) 04/24/08 M (RC) 02/09/11 M (RC) 08/09/10 U (RC) 03/21/11 O (RC) 03/24/11
O (IC) 12/14/09 M (RC) 03/14/11 M (RC) 01/05/09
U (RC) 01/19/10
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change
OTHER DISCLOSURES A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its coverage policies. Although the definition and application of these methods are based on generally accepted industry practices and models, please note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this valuation. This document may not be passed on to any person in the United Kingdom (i) who is a retail client (ii) unless that person or entity qualifies as an authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "Act"), or qualifies as a person to whom the financial promotion restriction imposed by the Act does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or is a person classified as an "professional client" for the purposes of the Conduct of Business Rules of the Financial Services Authority.
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CERTIFICATIONS I/(we), Craig Moffett, Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our) personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views in this publication.
Copyright 2012, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and AllianceBernstein (Singapore) Ltd., subsidiaries of AllianceBernstein L.P. ~1345 Avenue of the Americas ~ NY, NY 10105 ~212/756-4400. All rights reserved. This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Bernstein or any of their subsidiaries or affiliates to any registration or licensing
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requirement within such jurisdiction. This publication is based upon public sources we believe to be reliable, but no representation is made by us that the publication is accurate or complete. We do not undertake to advise you of any change in the reported information or in the opinions herein. This publication was prepared and issued by Bernstein for distribution to eligible counterparties or professional clients. This publication is not an offer to buy or sell any security, and it does not constitute investment, legal or tax advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of investments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about past performance of an investment is not necessarily a guide to, indicator of, or assurance of, future performance.
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