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  • How The Internet Is Effecting AT&T And Telecommunication Companies

    Josh Picker

    Will AT&T Grow or Will The Internet Create Dislocation for the Telecommunication Giant?

    The Facts

    AT&T (NYSE:T) has not posted stellar 1Q13 numbers, especially when comparing the company to other large industry competitors such as Verizon Wireless (VZW). T has a market cap of $186 billion with a reported 1Q13 EPS of $0.67, a 52% increase from the last quarter of 2012. Its segments provide wireless and data services along with wireline services including T's internet, TV, and voice package called U-Verse. T pays a generous dividend yielding 5.22% that continues to grow at an annualized growth rate of 4.88%.

    The Good

    T has increased its data revenues, service revenues, and total wireless revenues by 21%, 3.4%, and 3.4% respectively. Earnings have increased 8.5% since 1Q12. T's internet, TV, and voice package reported a 31.5% revenue growth YoY. U-Verse has also shown some growth in strategic business service revenues by growing 10.8%.

    Dislocation

    T has seen increased competition in the past couple of years with new mobile carriers carrying the much sought after iPhone. Companies like T-Mobile and Sprint have created trouble for companies giants such as T and VZW by offering customers the ability to turn in and then use unlocked iPhones as a substitute for buying a new iPhone. T's market dominance has weakened with the market for smartphones becoming increasingly saturated. Additionally, poor customer satisfaction, as reported by Consumer Reports, is dimming T's outlook for sustainable future growth.

    Although total wireless revenues are up 3.4%, T's largest competitor, VZW, reported a dominant 8.6% increase in the same category. Additionally, VZW's internet, TV, and voice service, FiOS, revenue grew 15.97%, slower than U-verse's 31.5%. U-Verse is still in the early stage of its life cycle. A product goes through different stages throughout its "life", the early stage of the cycle is typically attributed with high growth. T has posted impressive U-Verse numbers YoY that should give FiOS a run for its money.

    The condition of the economy and policies may contribute to the troubles T is facing. However, companies within the industry seem to be within the same economy so one could look past the issue of the state of economic conditions. Some analysts believe T must try to expand outside of the United States in order to increase its growth potential as the wireless competition intensifies and room for expansion seems limited.

    Hulu

    AT&T is involved in a bidding war with DirecTV for Hulu, the TV streaming giant owned by Disney, 21st Century Fox, and Comcast. The acquisition of Hulu for AT&T could be what the company needs to regain a market it once controlled. For $7.99/month, customers gain access to hundreds of television shows from a variety of entertainment channels. Hulu reported $700 million in revenue, up from $420 million in 2011. The revenue stems from online advertisements and their 4 million users.

    The acquisition of Hulu for AT&T could be what analysts and investors are looking for. As an online streaming giant, Hulu would expose AT&T into the online streaming market taking away revenue from online giants such as NetFlix, Amazon, and Aereo. The deal could also help AT&T's U-Verse bundle by creating some integration feature with its TV and internet package. If AT&T does acquire Hulu, look for investors to become hopeful about the company's direction and growth prospects. If DirecTV does outbid AT&T to gain Hulu, look for the company's growth prospects to be in a pickle as U-Verse loses ground to other substitutes to become the product of the past.

    Jul 22 2:15 PM | Link | Comment!
  • Competition Increases As Verizon Looks For New Ways To Gain Market Exposure

    Verizon Communication's Control over Market Share

    Profile

    With a market cap of $145 billion and an industry leader by its number of subscribers, Verizon Communications (NYSE:VZ) provides communications, information and entertainment products and services to consumers, businesses, and governmental agencies worldwide. Its wireless segment, Verizon Wireless, provides customers with access to voice and data services comprising of internet access through smart phones, tablets, and computers. VZ's wireline segment provides TV, broadband, and voice services through its bundle called Verizon FiOS.

    Subscriber growth, postpaid and prepaid compression, and Mixed Wireline Outlook

    Analysts covering VZ have lowered the company's wireless postpaid adds by 50k to 900k. Verizon still dominates subscriber growth within the market, beating out AT&T's ~500k adds as well as T-Mobile's ~300k. Prepaid adds are also expected to come in lower than anticipated with analysts marking down the number of adds to 25k from 175k. The pressure on postpaid and prepaid adds lowers estimates on wireless revenue growth to 8.0% YoY from 8.2% YoY.

    Wireline activities remain strong within its consumer segment but pressured by its wholesale and enterprise business. Verizon's Internet, TV, and voice package called Verizon FiOS, has grown roughly 16% since 1Q12. Within one year, FiOS has added 1.1 million subscribers and is now 69% of Verizon's consumer revenue. According to JPMorgan analysts, FiOS is estimated to add 285k subscribers, 44k more than previously expected. Verizon's main competitor, AT&T, also has an internet, TV, and voice bundle called U-Verse which has been growing at a faster pace in the last two years. It must be noted that U-Verse is only three years old compared with the matured FiOS. Wholesale and enterprise continue to struggle as analysts downgrade its revenue by 3% and 7.5% YoY, respectively. The decrease in Verizon's wholesale and enterprise business bring down Verizon's total wireline revenue to -1.4%.

    Capital Expenditures

    Verizon wireless is expanding its high speed data broadband network throughout smaller cities within the U.S. Within the past couple weeks Verizon has extended its LTE network throughout small cities in Nebraska, Tennessee, and New York. Verizon's network is almost fully equipped with LTE, well ahead of its competitor AT&T which extends LTE to only 60% of its market. Analysts estimate Verizon's capex to be nearly $9.3 billion, mainly due to Verizon's attempt to broaden its LTE coverage throughout the country.

    Competitors and Market Exposure

    The telecom industry is saturated with many competitors and a rapidly changing market due to increased demand for faster, sleeker, and better products. AT&T is currently receiving a lot of attention from analysts with its strong interest in Leap Wireless, a small prepaid carrier. The acquisition would help AT&T gain market exposure to prepaid adds, a weak point in Verizon Wireless' business. Another industry competitor, T-Mobile, recently merged with Metro PCS to become T-Mobile US. Together, the two now have a customer base of 43 million. The merge of the two "creates an even stronger disruptive force in the U.S. wireless market" says T-Mobile US CEO John Legere.

    As for the leader of the pack, Verizon has still yet to find a path to create growth so the company can move on to the next "stage". Recent reports suggest Verizon is showing interest in buying the 45% stake Vodafone has in its Verizon Wireless Company. The purchase would allow Verizon to enjoy healthier revenues and profits, however reports imply a buyout would require a large price tag. In other news, Verizon has flirted with the idea of extending its market exposure north of the border in a potential purchase of Canadian based wireless company, Wind Mobile. Verizon's latest offer was reported to be for $700 million. The acquisition would increase its market exposure as well as its customer base in Canada, increasing its future growth prospects.

    The Apple Dilemma

    In 2010, Verizon made an agreement with Apple in order to gain access to the Apple's iPhone. The agreement states, among other things, that Verizon is obligated to buy $23.5 billion worth of iPhones just for 2013. According to telecommunication analyst Chris Moffeit, the purchase commitment is almost twice the amount that Verizon has sold throughout 2012, creating a gap around $12 to $14 billion in money that may be owed to Apple. This could cause a stir for Verizon's investors as the situation would put pressur on Verizon's future cash flow.

    Concluding Remarks

    Verizon is not the largest company by market cap within the industry, however the telecommunication giant is the number one carrier by subscribers. Its superb consumer ratings along with its fast, vast 4G LTE exposure make it an investor favorite within telecommunication companies. However, there are points of concern. With AT&T acquiring a small prepaid carrier, T-Mobile merging with Metro PCS to become T-Mobile US, Verizon finds itself in need of a deal to gain market exposure. Its interest in Canadian markets would give Verizon a huge boost in global market share. Verizon must repond quickly, as the industry is fast paced and constantly changing.

    Jul 22 9:16 AM | Link | Comment!
  • Face-off: Signature Bank Of New York Vs. JPMorgan Chase & Co.

    June 2013

    Signature Bank of New York vs. JPMorgan & Chase Co.

    Profiles

    Signature Bank of New York

    Signature Bank of New York (NASDAQ:SBNY) is a commercial bank that operates 25 offices through the New York Metropolitan area. SBNY serves privately owned businesses and its owners and offers a variety of deposit and loan options to its clientele. In addition to deposit and loan options SBNY also delivers asset management services including the management of equities, options, fixed income, and mutual funds. The main source of competitive advantage for SBNY is derived from its focus on customer service. It has relied on word-of-mouth as a driver of growth.

    JPMorgan Chase & Co.

    With a market cap of $205.05B, JPMorgan Chase & Co. (NYSE:JPM) leads the financial sector as the largest bank in the world. In addition to various consumer and community loan services, JPM provides corporate and investment banking services that include raising capital, transaction services, advising on corporate strategy and structure, and risk management.

    Earnings and Growth

    SBNY reported Earnings per Share (NYSEARCA:EPS) of $1.07 through 1Q13, which has beat analyst estimates of $1.04. SBNY's business continues to sustain sturdy deposit and loan growth performances. According to JPMorgan Chase analysts, deposit growth for SBNY is up 18% and loans up 25% in the upcoming year. The industry is expected to deliver flat revenues. The beginning of 2013 marked an early feeling of optimism. Commercial real estate, multi-family loans, and specialty finance loans are up an average 38%.

    Contrary to SBNY, JPM reported a 1Q2013 EPS of $1.59. According to analysts at Macquarie, EPS for the year is estimated to jump to $5.66 from $5.46. The jump in EPS was mainly driven by larger than anticipated loan loss reserve release. Loan loss reserves decreased to $20.8B from $21.9B.

    Over the past five years JPM has invested in 800 new branches, 1200 Chase private client locations, 770 small business bankers, 300 investment managers, and 400 employees in Global Corporate Bank. Capital investment depressed earnings in the short term but should result in greater profitability moving forward. Although JPM is investing and changing its revenue structure, certain pressures are affecting the firm. In 2008, JPM acquired a bankrupt Washington Mutual and took over its portfolio of risky loans. Certain headwinds such as mortgage banking revenue, the Washington Mutual loan portfolio, and lack of credit leverage have negatively impacted JPM's profitability.

    JPM's management was put under scrutiny when the bank was hit hard in 2012 for a historic trading loss that cost the company $6B. Recently, JPM has been losing revenue due to taking credit risk off the balance sheet through the run-off of riskier mortgages as well as a run-off of the Washington Mutual loan portfolio. JPM has responded to a fall in revenue by generating growth through fees. As fees add up, revenue will start to show income generating results. However, with headwinds due to the run off of risky assets and a pressured NIM, I believe JPM will start generating higher earnings in the long run. In addition to changing the structure of JPM's revenue mix, growth & performance in JPM's commercial banking sector has declined with tightening loan spreads and a reduction in Net Interest Income (NYSEMKT:NII).

    Profitability Measures

    SBNY's management expects pressure on the company's Net Interest Margin (NYSE:NIM) in the coming quarters due to loan pricing competition occurring with the entrance of new players within the metropolitan NYC real estate industry. Management has characterized the competitive environment as being very high and borderline irrational. As a result NIM is estimated to be pressured down 0.05%-0.10% in 2Q2013 and 0.03%-0.07% in subsequent quarters. Despite management's concern regarding a weak NIM and new competitive firms within the industry, analyst reports reveal that revenue growth is occurring even with a lower NIM and core expenses reported below estimates. While the NIM is a concern to SBNY, NII is an important driving factor for shareholder value. NII is estimated to grow 11% in 2013. SBNY is operating new businesses with a lower spread; however the company is still generating enough cash flow for the benefit of investors.

    The commercial banking performance along with pressure on loan growth led a lower estimate of NIM for JPM. 1Q13 NIM is 2.37%, down from 2.40% in 4Q12. NII is expected to decline by 1% with loan growth as the driving factor.

    Credit Risk

    Credit trends continue to improve for SBNY. Non-performing asset (NPA) ratio at 0.19% is well below the industry average of 1.25%. NPA ratio explains the amount of assets with high risk of defaulting in relation to the amount of assets the institution holds altogether. Reserve to Loan ratio is at 1.25 indicating SBNY has enough economic capital in case of financial distress.

    The NPA ratio for JPM is trending down according to analyst estimates. 1Q13 NPA ratio was recorded at 0.48% slightly lower than the 4Q12 reported 0.50%. JPM still has many underlying risks with the acquisition of Washington Mutual and the inheritance of Providian, the consumer credit card company that went bankrupt. As a result of the acquisitions, JPM undertook risky portfolios with a higher probability of default.

    Recommendation

    My recommendation is to hold SBNY and JPM. SBNY is poised for growth in deposits & loans. However, the bank does not look as valuable due to struggles in the price war competition. JPM should be a hold as well considering slow growth and the amount of non-revenue producing risky portfolios such as Washington Mutual and other non-performing assets. JPM's increase in fees should result in greater profitability in the long term. However, with new investments depressing earnings, short term earnings will be slow to grow.

    SBNY's strong growth, its low credit risk compared to competitors within the industry, and its ability to produce income given the pricing competition makes SBNY a stronger and smarter investment when comparing to a firm like JPM.

    Jul 22 9:13 AM | Link | Comment!
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