Alltel Business Strategy

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					Alltel Corporation (AT)                                                                           Chi Yi Lee
Date:                               11/11/02              Consensus Estimate     09/02       12/02      12/03
Sector:                        Telecommunication          EPS                    $2.80       $3.21      $3.42
Industry:                          Wireless               P/E                    17.99       15.67      14.70
Current Price:                        $50.29              Long Term Growth Rate:                   7.13%
52 Wk Price Range:               $35.33 – $65.15          Ratio Analysis    Co.    Indus.     Sector SP500
Ave. Daily Vol:                     13,087.57             P/E (TTM)        17.99   16.44       27.12     24.75
Beta:                                  0.64               P/S (TTM)         2.06    1.74        2.31      3.03
Market Cap ($million):               $15,640              P/B (MRQ)         2.77    2.89        3.61      4.44
Shares Out (million):                311.015              ROA (TTM)         6.48    -0.92       4.99      6.41
Inst. Hold %:                         59.0%               EBO Valuation                                  $68.08
Div Yld:                              2.78%               Recommendation:                                 BUY
Total Debt/Equity:                     1.06               Stop-loss Price:                               $40.23
Member S&P 500?                    No (NYSE)                                Price     6-mo prob     12-mo prob
                                                          Target Price      60.00        32%            41%

                Investment Thesis                                               Summary
                                                            Fundamental Valuation:
   Alltel expects wireless revenue to increase $20            Positive: Based on a discount rate of 8.02%,
    million and telephone business revenue to                  Alltel’s EBO valuation is 35% above its current
    increase $10 million in the fourth quarter.                price.

   Many analysts believe the stock will perform            Relative Valuation:
    stronger than its competitors due to stable rural          Negative: Overall, P/B, P/S, PEG ratios are
    customers and two recent acquisitions.                     bearish, which indicate that Alltel is overvalued,
                                                               has slow growth, or less risky. A high PEG ratio
                                                               implies high P/E is not justified by high growth.
   Alltel (25.62) has s higher ROE (return on equity
    – 5 Yr. Ave.) than industry (19.28), sector (15.82)     Technical Analysis:
    and market (21.85). ROE is a measure of a
                                                               Positive: All technical indicators suggest a
    corporation’s profitability (net income divided by         continuation of an upward price trend.
    shareholders’ equity).
                                                            Earnings Analysis:
   Alltel Corporation has five major businesses:              Positive: Most analysts revised are up (34 out of
    financial services, advanced technology                    44).
    solutions, telecommunication services,
    communication products, and Alltel publishing.          Analysts Recommendations:
    These diversified divisions soften Alltel’s                Positive/Neutral: Mean recommendation is a
    earnings from the internet services burst and              “Hold” although over the past three months,
    satellite entertainment services.                          their recommendation also had large numbers of
                                                               “Buy.”

                                                            Institutional Ownership:
                                                                Positive: Net institutional investors increased
                                                                31, and total shares held increased 3.50%. This
                                                                increase suggests that institutional investors
                                                                believe the company is currently undervalued, or
                                                                it will increase its value in the near future.




                                                                                                              1
Company Summary
Alltel Corporation is an information technology company that provides communications and information
services to customers. “The communication operations include wireless, wireline, and emerging business
segments (internet access and network management operations).” The communication services are the core
business of the company, but the company also includes other divisions: Alltel Information Services, Alltel
Advanced Technology Solutions, and Alltel Publishing Corporation.1

Alltel Information Services has customers in more than 50 countries. The division provides information
processing management, outsourcing services, and consulting financial, mortgage and telecommunications
industries. 2

“Alltel's Advanced Technology Solutions provides a wide range of operations management, network, and
systems integration services to supply industry business solutions.”2

“Alltel Publishing Corporation is one of the nation's leading publishers of telephone directories for
independent telephone companies.”2

Divisional operating revenue and earnings for the first three quarters of 2002 are presented below (dollars in
millions). 3
             Division             Operating            % Operating          Operating % Net Income
                                   Revenue                Revenue            Earnings
 Wireless Operations                     3040.8                  51.07%           701.3             48.93%
 Wireline Operations                        1572                 26.40%           569.3             39.72%
 Support Services                          600.9                 10.09%             46.9             3.27%
 Information Services                      739.9                 12.43%           115.9              8.09%
 Total                                   5953.6                                  1433.4



Competition and Strategy

Competition:
Alltel Corporation primarily operates in wireless and local line communication services. Some of its
competitors include AT&T, Verizon Communication, Qwest, PC Sprint, and T Mobile. Although Alltel is
classified as a wireless industry, local line communication service is a large portion of the company’s total
profit. Unlike many competitors, Alltel does not provide entertainment cable services and does not provide
large quantities of internet services. The internet burst and increasing satellite services does not affect Alltel
directly compare to AT&T, Verizon Communication, or WorldCom.4


Strategies:
Since December 31 2001, Alltel has provided wireless communications services to 6.7 million customers in 21
states. Currently, the company owns approximately 35% of the market shares in Illinois, Chicago and
Houston, Texas. The company only focuses on businesses in rural regions and on market shares in a city
where Alltel can obtain more than 20%. Twenty percent of the market shares are determined after the
company enters the location awhile. If the market shares do not meet the requirement, it retrieves the


1 Data from www.harri sdirect.com
2 Data from www.alltel.com
3 Data from www. siliconinvestor.com
4 Data from www. moneycentral.msn.com




                                                                                                                     2
business from the city. This strategy allows the corporation to concentrate only on successful rural cities and
to provide high quality services. 5

Recently, Alltel acquired wireline properties from Verizon Communications and agreed to purchase local
telephone properties from Verizon Communication in the state of Kentucky. The acquisition increased 25%
customers for Alltel Corporation.6 Furthermore, Alltel also acquired Century Tel Inc, which increased 12%
of revenue for Alltel Corporation. After the acquisitions of Verizon Communications and Century Tel Inc’s
wireless business, Alltel added approximately 1.4 million customers. Alltel had a total of 7.6 million wireless
customers last quarter.

Another strategy that the company uses is more diverse business approaches than its competitors. Verizon
communications and AT&T provide internet services and entertainment cable services. Internet services and
entertainment cable services have struggled as substitutes (satellite entertainments, wireless internet services,
and freed dial-up internet services) increased and as economy slowdown. Alltel’s other divisions include
Information Services, Communication Products, and a Publishing Corporation.

 Alltel Information Services Inc. provides information processing services to the financial services and
telecommunications industries. The division also develops and markets software worldwide to financial
services and telecommunications companies. Information Services comprises 17% of the company’s total
operating revenues. “As a strategic business partner, ALLTEL focuses on best-of-breed market leadership
and best-of-suite integrated solutions, based on the business know -how and experience of nearly 40 years in
the industry. ALLTEL systems and supporting business processes are at the foundation of some of the
world's most successful financial services organizations.” 7 Communications Products is a major supplier of
telecommunications equipment and materials. Communication Products provides equipment to
communications companies, business systems suppliers, railroads, governments, and retail and industrial
companies. Last but not least, Publishing Corporation organizes advertising, sales, and distribution for 452
telephone directory contracts in 35 states. The major advantage that Publishing Corporation has is an
agreement with Verizon Communication. This agreement allows Alltel to provide all directory publishing
services including contract management, production and marketing. “ALLTEL Publishing is known for
industry-leading directory quality and listing accuracy, outstanding service to client telecoms and innovative
product- and revenue-development initiatives that are accomplished by comprehensive market planning and
sales contacts.” These diversified divisions have softened Alltel’s earning from the telecommunication burst
and economic slowdown.6




5 Data from www. multexinvestor.com
6 Data from www. wsj.com
7 Data from www.alltel.com




                                                                                                                  3
Historical Revenue and Earnings:

                             Historical Revenue                            Historical Earnings
                 FY 12/02        FY 12/01       FY 12/00          FY 12/02      FY 12/01       FY 12/00
1st Quarter       1832.91         1853.00        1645.00            0.68           1.19          0.68
2nd Quarter       1924.39         1920.40        1775.02            0.69           0.70          3.15
3rd Quarter       2082.00         1899.00        1803.20            0.76           0.71          1.53
4th Quarter                       1926.79        1843.76                           0.74          0.83
Total              5839.3         7598.94        7066.98            2.13           3.34          6.20

Alltel’s revenue has been growing slowly. Aided by the wireline acquisition, for the first time Alltel earned
revenue exceed $2 billion in third quarter. No information was provided regarding the large earnings in 2000
(2nd quarter and 3rd quarter).




                                                                                                            4
I. Fundamental Valuation
Alltel Corp.           PARAMETERS                             FY1       FY2      Ltg
as of 11/07/02         EPS Forecasts                             3.21     3.42    7.13%            Model 1: 12-year forecasting horizon (T=12).
                       Book value/share (last fye)              17.92                                          and a 7-year growth period.
                       Discount Rate                           8.02%
                       Dividend Payout Ratio                  47.09%
                       Next Fsc Year end                         2002
                       Current Fsc Mth (1 to 12)                   11
                       Target ROE (industry avg.)             19.28%

                       Year                                     2002      2003     2004     2005         2006       2007        2008       2009   2010    2011    2012    2013
                       Long-term EPS Growth Rate (Ltg)                           0.0713   0.0713       0.0713     0.0713      0.0713
                       Forecasted EPS                           3.21      3.42     3.66     3.93         4.20       4.50        4.83
                       Beg. of year BV/Shr                    17.920    19.618   21.428   23.366       25.443     27.668      30.052
                       Implied ROE                                       0.174    0.171    0.168        0.165      0.163       0.161

ROE                    (Beg. ROE, from EPS forecasts)           0.179    0.174    0.171    0.168        0.165      0.163       0.161      0.167   0.173   0.180   0.186   0.193
Abnormal ROE           (ROE-r)                                  0.099    0.094    0.091    0.088        0.085      0.083       0.080      0.087   0.093   0.100   0.106   0.113
growth rate for B      (1-k)*(ROEt-1)                           0.000    0.095    0.092    0.090        0.089      0.087       0.086      0.085   0.088   0.092   0.095   0.099
Compounded growth                                               1.000    1.095    1.196    1.304        1.420      1.544       1.677      1.819   1.980   2.162   2.368   2.601
growth*AROE                                                     0.099    0.103    0.109    0.114        0.121      0.128       0.135      0.158   0.185   0.216   0.251   0.293
required rate (r)                                     0.080     0.080    0.080    0.080    0.080        0.080      0.080       0.080      0.080   0.080   0.080   0.080   0.080
discount rate                                                   1.080    1.167    1.260    1.361        1.471      1.589       1.716      1.854   2.002   2.163   2.336   2.524
div. payout rate (k)                                  0.471
Add to P/B             PV(growth*AROE)                           0.09     0.09     0.09     0.08         0.08        0.08       0.08       0.09    0.09    0.10    0.11    0.12
Cum P/B                                                          1.09     1.18     1.27     1.35         1.43        1.51       1.59       1.68    1.77    1.87    1.98    2.09
    Add: Perpetuity
   beyond current yr   (Assume this yr's AROE forever)           1.14     1.10     1.07     1.05         1.02       1.00        0.98       1.06    1.15    1.24    1.34    1.45
Total P/B              (P/B if we stop est. this period)         2.23     2.28     2.34     2.40         2.46       2.51        2.57       2.74    2.92    3.11    3.32    3.54
Implied price                                                   42.97    43.88    45.01    46.14        47.25      48.36       49.45      52.69   56.15   59.85   63.82   68.08

Check:
Beg. BV/Shr                                                     17.92    19.62    21.43    23.37        25.44      27.67       30.05      32.60   35.49   38.74   42.43   46.62
Implied EPS                                                      3.21     3.42     3.66     3.93         4.20       4.50        4.83       5.45    6.16    6.97    7.91    8.99
Implied EPS growth                                                       0.065    0.071    0.071        0.071      0.071       0.071      0.128   0.130   0.132   0.134   0.137




Inputs:

       1. EPS Forecasts and long-term growth rate (LTG) are from Multex Investor (11/07/02).
       2. Book value per share derived from 12/31/01 balance sheet. Total equity = 5,565.8M, common
          stock outstanding=310.53M implying BVPS=5,565.8/310.53=$17.92.
       3. Discount rate: Used 20 year T-bond rate of 5.4% for risk-free rate, an expected return on market of
          9.5%, and Alltel’s beta estimated as 0.64 (from Multex) yielding a CAPM discount rate of 8.02%
          (=0.054+0.64(0.095-0.054)).
       4. Dividend payout ratio is from the trailing 12 months as reported by Multex.
       5. Next fiscal year-end is 2002.
       6. Current fiscal month is 11 (November).
       7. Target ROE=19.28%, the lagging 5 year Wireless industry ROE reported by Multex.

Output and Sensitivity Analysis:
   1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO
       valuation is $68.08.
   2. Changing the discount rate to 10.00% (+1.98%), the EBO valuation is $49.51. Thus, if the
       expectations in the model are realized, we should earn a return of approximately 10%/year.
   3. Changing the growth rate to 2.13% (-5%), the EBO valuation is $62.41.
   4. Changing the industry ROE to 9.28% (-10%), the EBO valuation is $37.15.

       The current price of Alltel is $50.29. The EBO valuation model yields an attractive valuation at an 8.02%
       discount rate. Increasing the discount rate to 10.00% yields a value close to the current market price.
       Decreasing the growth rate to 2.13%, the EBO valuation price does not change significant. Changing the
       industry ROE to 9.28% creates an EBO valuation price ($37.15) lower than the current market price
       ($50.29).




                                                                                                                                                                             5
II. Relative Valuation

Comparables
                                                                     Mean FY2
                                                                  Earnings Estimate    Forward    Mean LT       PEG       P/B     ROE      Value
    Ticker Name                         Mkt Cap   Current Price   (next fiscal year)    P/E      Growth Rate             (MRQ) 5 yr ave Ratio      P/S
1   VZ        Verizon Communication     106,410       39.00             3.00            13.00       4.93%       0.97      3.32    24.43%    0.14   1.56
2   T         AT&T Corp.                 54,060       14.06             0.29            48.48      13.60%       3.56      1.22    9.70%     0.13   1.01
3   BCE       BCE Inc                    14,630       18.09             1.94             9.32       9.32%       1.00      2.57    12.78%    0.20   1.12
4   FON       Sprint Corp.               11,630       27.27             1.39            19.62       1.94%       10.11     1.00    13.37%    0.07   0.72


    AT        Alltel Corp.               15,640       50.29             3.42            14.70       7.13%       2.06      2.77    25.62%   0.11    2.06


              Implied Price based on:                                                   P/E                     PEG       P/B              Value   P/S
1   VZ        Verizon Communication                                                    $44.46                  $23.65    $60.28            $63.21 $38.08
2   T         AT&T Corp.                                                               $165.81                 $86.93    $22.15            $58.50 $24.66
3   BCE       BCE Inc                                                                  $31.89                  $24.40    $46.66            $93.54 $27.34
4   FON       Sprint Corp.                                                             $67.10                  $246.59   $18.16            $34.79 $17.58


              High                                                                     $165.81                 $246.59   $60.28            $93.54 $38.08
              Low                                                                       $31.89                 $23.65    $18.16            $34.79 $17.58
              Median                                                                    $55.78                 $55.66    $34.40            $60.86 $26.00


Indicator                                                                Interpretation
P/E                             Neutral: Higher than industry (bearish), but lower than sector and market (bullish).
                                Among the competitors, Alltel stands mid-range.
PEG (P/E/G)                     Bearish: Higher than most competitors. It implies high P/E is not justified by high
                                growth.
P/B                             Bearish: Alltel has the second highest P/B than its competitors. Alltel is richly valued
                                relative to its competitors based on historical book value. High P/B indicates Alltel is
                                overvalued, has high growth, or is less risky.
Value (P/B/ROE)                 Bullish: After adjusting Alltel for historical ROE differences, the company has the
                                second lowest value ratio of the four competitors. Thus, the high P/B is driven by the
                                high ROE. After accounting for ROE differences, Alltel looks relatively attractive.
P/S                             Bearish: Alltel’s P/S ratio is greater than that of most competitors.
Summary                         As result, Alltel’s relative value shift slightly toward to bearish than bullish. Most
                                indicators are bearish, and a relative basis Alltel appears expensive.




                                                                                                                                                          6
III. Technical Analysis




Indicator                                                 Interpretation
Bollinger Bands     Poised for to breakout: The stock is at the top band. Other signals are bullish, so its
                    poised for a breakout.
Stochastics         Bullish: %K=74.61, %D=59.79. Because %K is greater than %D, and the gap is
                    increasing, it is bullish. Price %K and %D have a positive slope – bullish.
Moving Averages     Bullish: Price is higher than long-term and short-term moving average. Twenty-five
                    days moving average is over 100 days moving average, and the gap is increasing.
MACD                Bullish: MACD is greater than zero and is above the signal line.
Regression          Bullish: Price is on an uptrend. Current price is slightly below the trend line.
Momentum            Bullish: The price is slightly above than it was 100 days ago. Additionally, point and
                    slope are greater than zero.



                                                                                                              7
IV. Earnings Analysis
                                           Earnings Surprises
                      Sept. 2002     June 2002         March 2002       Dec. 2001         Sept. 2001
                      (Last qtr)   (2 qtrs prior)     (3 qtrs prior)  (4 qtrs prior)     (5 qtrs prior)
Estimate                 0.80           0.80               0.77            0.74               0.75
Actual                   0.84           0.79               0.77            0.75               0.74
Difference               0.04           -0.01              0.00            0.01              -0.01
                                       Mean Earnings Estimates
                    Dec. 2002       March 2003          Dec. 2002       Dec. 2003         LT Growth
                  This Quarter     Next Quarter       This Fiscal Yr Next Fiscal Yr.          Rate
Earnings              0.82              0.82               3.21            3.42               7.13
# Estimates            22                 6                 23              21                 15
                           Earnings Per Share Estimates Revisions Summary
                                               Last Week                        Last 4 Weeks
                                    Revised Up       Revised Down      Revised Up       Revised Down
Quarter ending 12/02                      0                 0               6                  4
Quarter ending 03/03                      0                 0               0                  0
Year ending 12/02                         0                 0               19                 1
Year ending 12/03                         0                 0               9                  5

In the most recent quarter, Alltel had a positive earning surplus – bullish. In the previous four quarters,
earning surpluses were small.

Alltel Corporation will have annual earnings of $3.21/share if they meet analysts’ expectations for this
quarter. Given that the telecommunication industry is undervalued and the current economic slowdown,
analysts’ forecast for 2003 is reasonable.

Alltel had a number of records of positive estimated revision of earning. Most (34 of 44) are positive.
Analysts forcast the company’s earning per share to increase – bullish.




                                                                                                              8
V. Analysts’ Recommendations
                      Current                 1 Month Ago          2 Months Ago          3 Months Ago
Strong Buy                3                        4                     4                     6
Buy                      10                       11                    11                     7
Hold                     11                       10                     9                     9
Underperform              0                        0                     0                     0
Sell                      0                        0                     0                     0
No Opinion                0                        1                     0                     1
Mean Rating             2.33                     2.24                  2.21                  2.14

Analysts recommendations have slightly moved toward Hold and Buy over the past three months. Although
last quarter (third quarter 2002) Alltel Corporation slightly exceeded analysts’ earning estimates, it is
reasonable to see that analysts downgraded the stock in the current economic situation.




                                                                                                            9
VI. Institutional Ownership
                                     # Holders         % Beg. Holders      # Shares (000)         % Shares
Shares Outstanding                                                            310,965             100.00%
# Institutions/Total Shares              523              106.30%             184,091             59.20%

# New Buyers                              46               9.35%
# Closed Positions                        45               9.15%
# Buyers/3 Mo. Shares Purch.             260              52.85%               21,990               7.07%
# Sellers/3 Mo. Shares Sold              229              46.54%               11,111               3.57%
Beg. Total Inst. Positions               492              100.00%              173,212             55.70%

# Net Buyers/3 Mo. Net Chg.              31                6.30%               10,879               3.50%

The net change of 31 new institutional investors is a bullish indicator. Additionally, the 3.5% increase in the
percentage of shares held by institutional investors is also bullish. Institutional investors are holding 59.20%
of stock, which signifies that institution investors are bullish.




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