Companies In The Telecommunications Industry example essay topic

By November 22, 2002 Table of Contents Introduction... 2 Economic Analysis... 2 Industry Analysis... 7 Company Analysis... 10 Conclusion...

12 Appendix... 14 Exhibit A... 15 (Refers to pg. 2) Exhibit B... 15 (Refers to pg. 3) Exhibit C... 16 (Refers to pg. 6) Exhibit D... 16 (Refers to pg. 6) Exhibit E...

17 (Refers to pg. 7) Exhibit F... 17 (Refers to pg. 8) Exhibit G... 18 (Refers to pg. 12) Bibliography... 19 SBC Communications Inc. is a telecommunications company with operations in many states across the United States. It currently trades on the New York Stock Exchange under the ticker symbol SBC, and is a component of the DOW 30. "SBC has 60 million phone lines in 13 states; is biggest markets are California (Pacific Bell), Texas (Southwestern Bell), and Illinois (Ameritech)". (web 11/17/02) Not only does this company offer phone services, but it is also involved with another telecommunications company in offering wireless services.

The reason that I chose this company is because I am an employee of the company when I am not attending school. Also, along with being an employee, I use many of the services which they offer. Some of the services I use include their local and long distance service along with their DSL internet service. Since I currently invest in the company, I thought that analyzing this security would help me with my investment decisions in the future.

This analysis will further increase my knowledge in what the company is doing and how they are responding to certain changes in the market. ECONOMIC ANALYSIS Every company that offers securities is affected by changes in the nation's economy. The Gross Domestic Product (GDP) can provide a company with a great deal of information from personal consumption expenditures and private domestic investments to government consumption expenditures and gross investments. This helps the firm to estimate the opportunity for sales increase by looking at the overall economy. In the past five years personal consumption expenditures for services have grown from 3,454.3 billion to 4,348.5 billion. However, the overall GDP has fallen about 1% in comparison from 1998 to 2002.

In 1999 the GDP rose 7% from the past year and in 2001 changed almost -2% from 2000. (Refer to Exhibit A) These numbers help to provide SBC with information about possibilities of increasing or decreasing their sales in the upcoming years. The fall of the GDP can be attributed to the decrease in the net exports of goods and services. (web 11/17/02) Currently, the GDP has risen 3% from 2001 and shows the opportunity for SBC to capture future sales from consumers in the next year as it continues to rise. (Refer to Exhibit B) In the future the GDP is expected to rise as companies production grows. The Consumer Price Index (CPI) is another variable along with inflation that helps a company measure whether its prices are acceptable in the economy. Inflation rates are closely related to the CPI because inflation rates are measured as the rate of increase of the CPI.

(Essentials of Investments, Bodie) From 1998 until 2000, the CPI increased along with inflation; however, in 2001 it started to decrease to its current value today. The CPI has risen and fallen in the past couple of years, but it expected to increase in the future. (web 11/17/02) Very low inflation rates are allowing consumers to spend more on new technology; consequently, since the new technology is more expensive the CPI is expected to rise which in turn would cause inflation rates to rise. Although the inflation rates are expected to increase, the rise will incur in small increments over the next few years. Interest rates are vital in investment decisions for many companies. If interest rates are high, it reduces the cash flows of companies and reduces the possibility for growth. The interest rates have fallen since 1998, where the interest rate was almost 5.5%.

The rates continued to decrease since then, except for the sudden increase to 6.24% in 2000. In 2001 they fell sharply to 3.88%, and in 2002 they continue to fall. The current rate is just above 1%, and with this it is allowing companies to borrow more money for expansion and other investment opportunities. (web 11/17/02) Since the markets have not grown as much as they were first expected, the interest rates were lowered by the Federal Reserve Board to stimulate borrowing and more investing; however, in the future the interest rates are expected to increase slightly over the next few periods. The money supply is very important to our economy and is watched closely by the Federal Reserve Board (FED). Money as defined by the Fed is "anything that serves as a generally accepted medium of exchange, a standard of value, and a means of savings or storing purchasing power". (web 11/17/02) They control the amount of currency in circulation as well as currency in bank vaults, and the money supply is a good indicator of economic activity in the future. In the past, the Fed has tracked the money supply very closely.

As of right now, the currency in circulation is $555 billion, which does not include checkable deposits. An increase in the money supply could stimulate borrowing and buying, but with interest rates already at an all time low the Fed has decided to keep the money supply at its current condition. Large time deposits at banks and thrifts are $825 billion indicating that companies are currently holding onto enough money to use for expenses. (web 11/17/02) The money supply will increase in the future as the demand for the production of products increases by the consumers and businesses. Government spending has continued to increase each year as it has been for the past five years. Although it has not increased too dramatically, it has risen nonetheless.

With the pending conflict in Iraq, the government has spent much more on defense than in prior years. In 2002, the government was approved to spend $355.4 billion on defense which is the second highest expenditure next to the $517 billion for the District of Columbia. (web 11/17/02) One concern the economy has on the government is that the borrowing of the government will be so extreme that it will raise interest rates and not allow for businesses to invest as much. However, all government spending does not have a bad influence on the economy. For example, spending on foreign operations can increase the strength in ties between foreign markets and our own. The government plans to spend about $16.35 billion in foreign operations this year which will help to improve investments in foreign markets and also in our own market. (web 11/17/02) In addition to these few programs the government has allocated spending on other programs such as: agricultural, commerce, energy and water, interior, legislative, transportation, labor, military construction, treasury-postal, and veteran's affairs. All of these programs make up the list the government considers when asking for finances.

All of the programs break down into sub-programs that allocate the money to certain activities. All of this government spending can have an impact on certain companies in the market. For example, if a company receives a government contract for something the price of the stock is usually affected. The employment rate can tell a company much about the economy during different periods of the year. If there is a low unemployment rate, it usually means that the economy is much stronger than if it was high.

The employment rate over the last five years has grown each year. Approximately, 1 million more people are employed each year than the previous year. (Refer to Exhibit C) However, there are also 750,000 more people unemployed each year than the previous one. (Refer to Exhibit D) Thankfully, since more people are being employed per year than unemployed the unemployment rate is going down. In response, this is constantly making our economy stronger. (web 11/17/02) A strong economy can give a company a chance to expand and create new jobs, which lowers the unemployment rate and increases the economy even more. In the future, the unemployment rate is expected to decrease more because of the growth of companies as the economy continues to get stronger.

The cycles of the economy are different from every year. Although, the fourth quarter always seems to be one of the stronger periods of the year. The cycles change as the overall economy changes. When there is a recession in some industry other industries can hopefully offset the losses; however, when the whole economy is in a recession one can not estimate when it will recover. Fortunately, the economy in the past has been pretty stable most of the time. On the other hand, in the last year the economy faltered and now it is beginning to recover.

In the future the economy is expected to go through a recovery cycle and continue to perform better than it has in the last year. Foreign exchange rates are important in the importing and exporting of goods and services between countries. The U.S. Dollar has been strong in the past and is continuing to be stable into the future. Unfortunately, the dollar has weakened a little compared to other currencies, but it is still one of the strongest.

Our economy has one of the strongest currencies in the world and it allows us to import and export goods with any other countries. The exchange rates haven't changed much from the past implying that it will continue to be a very stable currency. For example, from 1998 to 2002 the U.S. dollar compared to the United Kingdom Pound has lost only. 22 of a pound. (web 11/17/02) This shows that the dollar has weakened, but it is projected to increase in the future if the economy continues to improve like it has been in the past months. INDUSTRY ANALYSIS The telecommunications industry has been a highly volatile industry during the last two years. The top nine companies that comprise the telecommunications industry are: SBC Communications Inc.

(SBC), Verizon Communications (VZ), BellSouth Corporation (BLS), Alltel Corporation (AT), Qwest Communications International Inc. (Q), Centurytel Inc. (CTL), Citizens Communication (CAN), Commonwealth Telephone Enterprise (C TCO), and Broad wing Inc. (BRW). All of these companies are publicly traded on the New York Stock Exchange, except for Commonwealth Telephone Enterprise which is currently traded on the NASDAQ. (web 11/17/02) Out of nine only four have reported positive gains over the past five years. (Refer to Exhibit E) Many variables in the industry explain why the companies are not being able to expand and report gains.

The most important variable holding companies back from being able to report positive earnings is the government regulations on the companies. Most of the companies rely on their local and long distance phone service for much of their revenue. However, the government is limiting how much they can expand. They are allowing for smaller companies to compete with the larger companies by regulating how much of the market the larger companies are able to obtain. Although this is hindering the larger companies they still produce much revenue from other operations that they take on. Some of these operations are: internet access, wireless communications, and various phone options like caller ID and call waiting.

These operations produce revenue that help the companies, and the revenue is related to the rise and fall of the prices of the companies stocks. In the telecommunications industry, SBC Communications Inc. is second to its biggest competitor Verizon Communications. Verizon has $107.54 billion in capital; whereas, SBC has $83.64 billion in capital. The closest company to those two has $48.33 billion, which is Bellsouth Corporation. Since these three have the highest market capital, one would assume that they would have the highest volume traded.

However, Qwest is the company that has a higher volume of trading than any of the companies. (web 11/17/02) In the future, they expect the telecommunications industry to regain much of its share in the total market and increase in the future. In the past most of the telecommunications companies had reported profits until the fourth quarter in 2001. Since the fourth quarter in 2001 until today all of the companies have reported losses of varying degrees. (Refer to Exhibit F) Although the companies have sustained losses the outlook for the future looks promising since they are predicting higher estimates in growth and earnings. The PE ratio for this industry has been as high as 68.9 this past year which means that this industry is not the one to give you the best earnings for you dollar.

When you have to invest 68.9 dollars for one dollar of earnings one might be tempted to invest their money in other industries in the market. Also the price / sales ratio is set at 1.56 which could be considered a little high, but the GDP is rising so the industry should be able to capture more sales and that will lower the ratio. The return on assets for the industry is currently at 1% and the return on equity is at 3.4%. These low ratios are a good explanation for why the industry is doing so badly.

The ratios need to be improved and it is going to take almost all of the companies in the industry to improve in order to change the ratio of the industry. The ratios for this industry are not up to par and a big reason is because of the growth over the past years. From five years ago the growth has been negative and still continues to be negative since then, however with expectations of this market to increase over the next year or so the growth is expected to improve. It would take a drastic change to completely come out of reporting negative growth, but a positive change in the industry could spark the beginning of a change in the industry. (web 11/17/02) The cycles of the telecommunications industry are hard to examine and extremely hard to predict. Over the past year we have seen many government regulations that are hindering the industry from expansion and limiting what the company can do. For example, Pac Bell Corporation, a subsidiary of SBC Communications, is trying to expand their long distance services in California and the government is preventing the company from doing so. (web 11/17/02) These types of regulations are what make the industry so unpredictable.

In the past five years, the industry went from being very stable to its present unstable condition. Now in its current condition the industry has shown some promise and started to regain its past reputation. Over the next few years the industry is expected to outperform the industry and prove its stability. COMPANY ANALYSIS "SBC Communications Inc. is the second largest U.S. provider of local telephone and wireless service (through its 60%-owned Cingular joint venture with BellSouth)". (Standard & Poor's) SBC is the leading provider of DSL in the United States and is continuing to expand to other customers by updating their lines with fiber optics to increase sales in the next year.

Since it is such a large publicly traded company, SBC is traded on the New York Stock Exchange and reports to the Securities Exchange Commission (SEC). Their SIC number with the SEC is 4813 and is under the telephone service sector. (web 11/17/02) This number puts the company in the same sector with some of its competitors. SBC has a beta of. 73 compared to the market beta of 1, which means that it is more stable than the average company. Although you can see that this company has had its share of ups and downs by its varying growth trends over the past years. The income growth trend from five years ago until the present is a -16.04%, and the trend from three years ago until today is almost double at -30.28%. (web 11/17/02) This shows that the company has been conserving this money and not expanding like it once was.

Also, this could mean that the company has not made as much income as it had in the past. This small beta is a surprise considering that the industry has been hurt tremendously when the market was hurt. I believe that there is more risk actually associated with this stock than the beta actually shows. Another surprising fact is the price / sales ratio which is $1.30 higher than the industry average. This means that they have to spend a $1.30 more than what any other company in the industry has to spend just to receive one dollar of sales.

A company wants to have a low price / sales ratio so it can increase its overall revenue and look more attractive to an investor. And if more investors were attracted to the company, the overall stock price could have a positive reaction. The P / E ratio for the company is well below the industry average of 68.9. SBC reports their ratio at 12.9 meaning that this is a company whose stock has room to move up in price. However, the current and quick ratio for SBC are both lower than the industry average by.

1. The current ratio is reported at. 6 and the quick ratio is reported at. 5. This ratio indicates the firm's ability to avoid insolvency, but since they are both lower than the industry, they are in poor standing. The only positive thing about these ratios is that they are close enough to the industry that they do not pose a threat to the stock price.

The return on assets and return on equity are well above the industry average. (web 11/17/02) This implies that the company is getting very good returns on the assets and equity of the company. Reporting higher numbers than the industry in these two areas is positive to investors because they are the basis of figuring the growth of earnings. The Gordon Model for this company shows that there is constant negative growth for this company in the past years. It is supported by the growth rates that the company has been reporting.

Over the past year the stock continued to fall, but just in this last quarter, the stock for the company has been climbing and there are many signs of positive growth in the future. The whole market was in a recession and it is starting to recover. The price history shows, that it will return to where the stock was valued at four years ago. (Refer to Exhibit G) If the company returns follows the trend that it has in the past, it will regain its position. Over the past years SBC Communications has followed a pretty predictable growth pattern.

The long position trader would be the best purchaser of SBC Communications Inc. stock. The trends have been somewhat predictable and the longer you are in the market with the stock, the more money you make. The stock rises and falls dramatically, but it is over a long period of time. The outlook for SBC Communications is a highly positive one.

The company plans to upgrade its entire network with fiber optic cable and bring internet connections closer to all of their customers. "The network upgrade, called Project Pronto, will cover about 80% of SBC's U.S. customer base when completed at the end of 2002". (Standard & Poor's) This development will help SBC to be able to offer better service to their customers and state-of-the-art connections to give them a competitive advantage. Along with all of the upgrades and revenue being supplied to its wireless carrier Cingular, SBC expects to gain more of the market share in the telecommunications industry.

Given all of the information in this analysis, it clearly shows that this could be considered a stock that has some promise. Although it has reported negative growth in some areas and less than par ratios, other companies in the telecommunications industry have done the same. If you look at the big picture, the whole industry has lost money and decreased in value, but SBC has not lost as much as some of the other companies. It has lost money and acquired more debt, but the debt is being used to upgrade their network and improve their services to the customers. In turn, the customers will be more satisfied with this company and their revenue will increase. Considering that the market is just starting to come out of recession, I believe that it is the perfect time to purchase this stock.

If one is going to purchase this stock, they are going to have to be prepared to keep it for a couple of years to see high returns. The stock is a very stable stock since it does not gain or lose enormous amounts in a single day or week. Although, you can not just assume that it is going to be stable all of the time, even though its beta is under the markets. The New York Stock Exchange reacts based on investors in the economy, and if something were to happen to the economy then all the markets would suffer. In conclusion, I would purchase this stock and I do see it increasing in the near future. The time to act is now.

APPENDIX Exhibit A (web) Exhibit B Board of Governors and Reserve Bank presidents Indicator Range Central tendency 2002 Change, fourth quarter to fourth quarter 1 Real GDP 3 to 4 3-1/2 to 3-3/4 Average level, fourth quarter Civilian unemployment rate 5-1/2 to 6-1/4 5-3/4 to 6 2003 Change, fourth quarter to fourth quarter 1 Real GDP 3-1/4 to 4-1/4 3-1/2 to 4 Average level, fourth quarter Civilian unemployment rate 5 to 6 5-1/4 to 5-1/2 (web) Exhibit C (web) Exhibit D (web) Exhibit E (web) Exhibit F (web) Exhibit G (web)

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