Strategic Analysis- AT&T

Question: Since this is your first consulting job for this client, you want to do it right. After all, this could lead to additional analysis opportunities for you down the road. After benchmarking with other financial consultants, and viewing some of their work, you feel you need to provide the following information to your client: Brief history and description of the company background, primary product/service offerings, customers, business sector(s), etc. Financial analysis of XYZ Company based on data provided from the last four financial reports (Annual Reports and 10Ks). (note: you must choose a publicly-traded corporation in order to be able to access this data) Based on discounted free cash flows, determine enterprise value, equity value and value per share. Weighted average cost of capital details Report on the strengths and weaknesses of any financial trends of XYZ Corporation XYZ Companys competitors who are they, size, background, etc. XYZ Companys industry what are trends in t his industry? Based on your research, where do you think XYZ Company is going to be in three to five years? Provide the valuation on 3 to 5 years going forward. To help answer this question you need to know the company as well as the industry. Make sure you provide and support the assumptions used to project the companys future. Answer: Introduction One of the oldest telecommunication companies in the world is ATT being founded in the year 1874. During the mid 20th Century the company was the largest telecommunication company in the world with employee strength of 1,000,000 people and revenues over $ 3 billion. The services of the company include voice calls, internet services as well as voice over internet protocol services (VOIP). The service users of the company include both the public and the private sector. The company had monopoly in the telecommunications sector over most of the period in 20th Century. In 2005 the company merged with SBC communications and was subsequently rechristened as ATT Inc (ATT, 2016). The paper will analyse pertinent financial information and evaluation of the competitors so as to come at a valid conclusion. Financial Analysis Financial analysis is one of the crucial parameters that lucidly illustrate the standings of an organisation. It is carried out by different ratios and other metrics. For ATT such analyses have been elaborated in the subsequent section. Revenue of the company for the financial year 2012, 2013, 2014 and 2015 was $127434 million, $128752 million, $132447 million and $146801 million respectively. The gross profit margin for the company for these four years was 56.7 %, 60 %, 54.2 % and 54.3 % respectively (Morning Star, 2016). Operating Income (in USD Million) for 2012, 2013, 2014 and 2015 was 12,997, 30,479, 11,746 and 24,785 respectively. The operating margin for these four years was 10.2 %, 23.7 %, 8.9 % and 16.9 % respectively. From analysing the financial data as provided by the annual reports the dividends paid was 1.77USD, 1.81 USD, 1.85 USD and 1.89 USD respectively for the years 2012-2015. The payout ratio for the company for these four years was 141.6 %, 125 %, 56.6 % and 208.9 %. Net income of the entity from 2012 to 2015 (in USD Million) was 7264, 18249, 6224 ad 13345. Evaluation of the financial data indicates that ATT has been fairly successful in its operation (Karmarkar and Apte, 2007). Instances of fluctuations can be seen within the performances of the company but overall performance has been quite satisfactory. One of the key indicators of the economic value of an entity is denoted by Enterprise value. In other words Enterprise Value is the assessment of an entitys total value that includes market value of stock, preferred equity and debt added with minority interest and deduced by cash and investments (Shin and Bartolacci, 2007). For the chosen entity the Entity Value is $ 389.12 billion. EV/EBIT ratio is also used in order to understand the acumen of an entity. For AT T the Earnings before Interest and Taxes are $27,224 million. As such the EV/EBIT ratio is 14.24. The EV/ EBITDA of ATT are 7.30 where EBITDA for the company is $53, 105 million. The book value per share for the company for the FY 2015 was $19.96 (Morning Star, 2016). Formula used for the calculation was (Total Equity Preferred Stock)/ Shares Outstanding = (122,671- 0)/6145 = 19.96. In the last 12 months value per share grew at a rate of 20.4 %. Again, the weighted average cost of capital (WACC) is denoted as the average ra te that is needed to be paid to the different security holders for financing the assets. It is often called as the cost of capital of an organisation. From the trailing twelve months data (TTM) the WACC of AT T is 3.69 % with return on invested capital being 7.63 % (ATT, 2016). It has been illustrated by the following equation. WACC=E/ (E+D)*Cost of equity+ D/ (E+D)* Cost of debt * (1-Tax rate) Where, Cost of equity is 1.510+0.35*7.5 %= 4.135 % Cost of Debt = 4120 / 103992.5 = 3.9618% Average tax rate based on the tax rate of last two years is 34.4 % This indicates that the company has been successful in generating greater return from the investment than that of the costs needed to raise such capitals. In other words the company is earning excess returns. Based on the discussion as carried out in the above section it may be opined that ATT has been able to operate successfully and to meet the needs and expectations of the different stakeholders (He et al, 2006). Trends of Strengths Weaknesses (financial) The data as deciphered in the above section can be used in ascertaining certain trends for the company. The revenue over the four year period for the entity has increased from 127,434 million to 146, 801 million. Other than revenue operating income, net income, dividends and payout ratio have all increased in this four year window. Ratio analysis has also illustrated that the company has been successful in extracting greater returns from the market (Seo et al, 2008). Some of the crucial elements that have enabled the company to bolster its performance are effective cost management strategies, repurchase of shares and innovative product offering. The company has invested significantly in upgrading the services for expanding the LTE services. However some of the issues that have cropped up can be described as the tepid wireless subscriber trends, discount plans, declining Average Revenue per User (ARPU) and increased spending on infrastructure (Dittrich and Duysters, 2007). Transmission speed of data and overall usage of it has increased drastically over the years that have resulted in exponential cost rise. The features of a good telecommunication service are transmission speeds, accessibility and price. The company, in order to increase capacity and spectrum, has incurred more than $ 40 billion in metropolitan areas like Chicago, Washington, Los Angeles and Dallas. Moreover, the continuous tussle between the telecommunication provider resulted in decline of margin and AT T is no different (Cricelli et al, 2011). The operational scale of ATT is essentially vast and the company has a complex structure that has made it more difficult to be flexible as compared to some smaller companies. Greater spending by the company on LTE networks and infrastructure has also increased its debt obligation. Consolidated revenues for the company grew at a rate of 23 % over the year to $ 40.5 billion. When Earnings per share metrics (EPS) are compared it indicates to an increase of 10.8 % (Morning Star, 2016). Moreover free cash flow for the company increased to $3.2 billion signifying an increase of 17% when metrics from the FY 2012 are compared. Some of the grey areas that have emerged from analysis of the company are the decline of U-Verse consumers, post-paid customers and decline in video subscribers. To sum up, it may be opined that there are pros and cons for the company. The positives as decoded from the annals far outweigh the weaknesses. With vast operational experience ATT is expected to bridge the shortcomings and gaps in the future and bolster the organisational standings (Owczarczuk, 2010) Competitor and Industry Analysis The aspect of rivalry is omnipresent and companies irrespective of their nature are constantly engaged in competition so as to enhance operational sphere and subsequent revenue. The American telecommunication sector is characterised by a large number of companies vying with each other for tapping this ever growing sector (Dholakia et al, 2013). Some of the notable competitors of ATT include Verizon Communications Inc., Vodafone Group, Deutsche Telekom, BT Group, Telefonica and other numerous smaller companies. All these companies have their USPs and loyal customers. Moreover, the process of globalisation has also led to entry of foreign entities intensification of the competition (Hanif et al, 2010). Highlights of the performances of some of the key players have been carried out in the subsequent section. Verizon Communications has a market capitalisation value of $218, 693 million with net income of $ 14,441 million. The dividend yield % for the company was 4.2 with interest coverage ratio of 6.7. The debt to equity ratio of the company was 4.8 with Compound Annual Growth Rate (CAGR) % over a five year period being 4.3. Vodafone group has a market capitalisation of $82889 million with net income figures of $ (4024) million (Morning Star, 2016). The % dividend yield of the company was 5.0 and interest coverage ratio of -1.6. Again, the debt to equity ratio of the company was 0.4 coupled with 5 year CAGR % being -2.2 %. For Deutsche Telekom market capitalisation value was $ 80,062 million and a net income of $ 5592 million. As a % the dividend yield of the company was 3.5. The compounded annual growth rate of the company over a span of five years was 2.1 %. The interest coverage ratio of the company was 2.8 and debt to equity ratio being 1.6 (Berg et al, 2012). BT Group posted a market capitalisation value of $ 51178 million along with a net income figure of $ 2665 million. The dividend yield as a % was 3.6 along with an interest coverage ratio of 6.9. The D/E ratio for the company was 1.1 with CAGR % of -1.4. Telefonica has a market capitalisation value of $50,000 million USD and net income value of $1844 million. Dividend yield, expressed as a percentage, for the company was 4.4 %. Interest coverage ratio for Telefonica was 1.1 % and a D/E ratio of 3.2. The growth rate o9f the company as expressed by the CAGR was -6.6 % (Battistella, 2014). In light of the above discussion the performance of AT T can be stated to be fairly positive. The company has operated efficiently and some of the metrics of the company are significantly better than that of its rivals. The industry average in the telecommunication sector in US is: market capitalisation of $17292 million, net income of $ 119,412 million, 3.5 % dividend yield, CAGR 8.3 %, debt to equity ratio 0.9 %. Thus some of the metrics for ATT is higher than the industry average as well as the rivals (Malhotra and Kubowicz, 2013). Due to sheer volume of the company the CAGR may be lower than some of the newer entrants but the overall scenario is favourable. Future trends All over the world the telecommunication sector is growing rapidly. However such growth rate is lesser in developed markets like that of US. Experts have pointed out that service fees will keep diminishing over the years with content and service being projected to rise significantly. Another significant trend is spurt of internet connectivity and the world is poised to enter the era of zettabytes (Merritt, 2011). Another significant trend is that there will be an incursion of boomers and the US market will be thoroughly saturated. Carriers and service providers will be expected to provide more exhaustive security measures and telecommunication companies have to include greater technical finesse and innovation. For ATT these developments will provide challenges and growth opportunities alike. There will be massive consumption of data coupled with spurt of wearables. It is expected that fifth generation mobile networks (5G) along with internet of things (IoT) will bring a wave of chang e (Paulrajan and Rajkumar, 2011). Challenge for ATT lies in providing quality and affordable services in a market that is witnessing increased usage, failing rates and sparse spectrum. Recommendations Owing to the volatility of the money market it is difficult to predict precisely. For the same reason forecasts are made only for the next one/two quarters. From observations of the analysts few trends have been depicted that have been used for drawing valid recommendations. The 12 month price target of the shares of the company comprises a median of $45.00, high estimate of $48.00 and low estimate of $26.00. When compared to the last price, the median represents an increase of 7.24 % (Financial Times, 2016). Overall view of the analysts on the stock prices of AT T is that they are overweight. In other words the stock of ATT offers better value for money than others. As such investing in the stock of the company will be a good option. The 2016 dividend of the company is expected to be around $1.928 and 2017 dividends of $ 1.973. These predictions show that dividend of the company will grow at a rate of 2.01 %. From this criterion too the company has performed well. Revenue for the company for the second quarter of 2016 was $40.52 billion. For the third quarter the revenue is expected to go up to $41.15 billion. Finally the fourth quarter revenue is slated to be $ 42.39 billion with an average growth rate of 5.59 %. According to the analysts overall revenue of the company for the FY 2016 and FY 2017 will be $164.62 billion and $167.86 billion respectively with growth rates of 3.83 % (Financial Times, 2016). Conclusion The paper has illustrated history and brief description of one of the largest telecommunication companies in the world with relevant discussion on the services. The financial performance of the past four years have been analysed by the help of the annual reports. Discounted free cash flows have been used for determining the enterprise value (EV), equity value and value per share. Moreover the weighted average cost of capital has also been ascertained and appropriate trends have been discussed. It has been observed that the company has performed better than many of the rivals and is poised to expand further (Cricelli et al, 2011). Future trends within this industry have been stated along with effective recommendations that the company will find useful in augmenting its position. References: ATT (2016): Online accessed from https://www.att.com/gen/investor-relations?pid=9186 accessed on 13/8/2016 Battistella, C. (2014). The organisation of Corporate Foresight: A multiple case study in the telecommunication industry.Technological Forecasting and Social Change,87, 60-79. Berg, S. V., Jiang, L., Lin, C. (2012). Regulation and corporate corruption: new evidence from the telecom sector.Journal of Comparative Economics, 40(1), 22-43. Cricelli, L., Grimaldi, M., Ghiron, N. L. (2011). The competition among mobile network operators in the telecommunication supply chain.International Journal of Production Economics,131(1), 22-29. Dholakia, R. R., Mundorf, N., Dholakia, N. (2013).New infotainment technologies in the home: Demand-side perspectives. Routledge. Dittrich, K., Duysters, G. (2007). Networking as a means to strategy change: the case of open innovation in mobile telephony.Journal of product innovation management,24(6), 510-521. Financial Times (2016): Online accessed from https://markets.ft.com/data/equities/tearsheet/forecasts?s=T:NYQ accessed on 17/8/2016 Hanif, M., Hafeez, S., Riaz, A. (2010). Factors affecting customer satisfaction.International Research Journal of Finance and Economics,60(1), 44-52. He, Z. L., Lim, K., Wong, P. K. (2006). Entry and competitive dynamics in the mobile telecommunications market.Research Policy,35(8), 1147-1165. Karmarkar, U. S., Apte, U. M. (2007). Operations management in the information economy: Information products, processes, and chains.Journal of Operations Management,25(2), 438-453. Malhotra, A., Kubowicz Malhotra, C. (2013). Exploring switching behavior of US mobile service customers.Journal of Services Marketing,27(1), 13-24. Merritt, C. (2011). Mobile money transfer services: the next phase in the evolution of person-to-person payments.Journal of Payments Strategy Systems,5(2), 143-160. Morning Star (2016): Online accessed from https://financials.morningstar.com/competitors/industry-peer.action?t=T accessed on 13/8/2016 Owczarczuk, M. (2010). Churn models for prepaid customers in the cellular telecommunication industry using large data marts.Expert Systems with Applications,37(6), 4710-4712. Paulrajan, R., Rajkumar, H. (2011). Service quality and customers preference of cellular mobile service providers.Journal of technology management innovation,6(1), 38-45. Seo, D., Ranganathan, C., Babad, Y. (2008). Two-level model of customer retention in the US mobile telecommunications service market.Telecommunications Policy,32(3), 182-196. Shin, D. H., Bartolacci, M. (2007). A study of MVNO diffusion and market structure in the EU, US, Hong Kong, and Singapore.Telematics and Informatics,24(2), 86-100.