1. Alltel Corporation (AT) Robert T. Phillips
Date: 11-21-06 Consensus Estimate 12/05A 12/06E 12/07E
Sector: Telecommunications EPS 2.15 2.85 2.83
Industry: Mobil Telecom P/E 26.26 19.84 19.98
Current Price: $56.55 Long Term Growth Rate: 6.82%
52 Wk Price Range: $52.34-$68.19 Ratio Analysis Co. Indus. Sector SP500
Ave. Daily Vol: 2,080,000 P/E (TTM) 26.26 24.48 26.26 20.60
Beta: 1.15 P/S (TTM) 2.54 2.56 2.85 2.95
Market Cap ($million): $21,110 P/B (MRQ) 1.62 2.83 3.84 3.90
Shares Out (million): 373,630 ROA (TTM) 3.92 3.14 6.38 8.26
Inst. Hold %: 70.68% EBO Valuation $27.40
Div Yld: 0.88% Recommendation: HOLD
Total Debt/Equity: 0.22 Stop-loss Price: 45.24
Member S&P 500? Yes Price 6-mo prob 12-mo prob
Target Price $61.00 56% 62%
Investment Thesis Summary
• The EBO valuation shows the current price
of the security to be overvalued by over $29. Fundamental Valuation:
Negative: Using a discount rate of 10.78%, Alltel
• Although mean rating has increased, analysts Corporation’s EBO valuation was $27.40, over $29
lower than the current price.
from Reuters.com are still giving outperform
as consensus rating.
Neutral: Overall consensus that the current
security price is fairy valued, although positive
• Mergers are key aspect of Alltel’s business indications came from the P/E and value ratios.
strategy. In 2006 alone Alltel acquired 668.6 Technical Analysis:
million in assets from mergers and Positive/Neutral: Stochastics, MACD, and Price
acquisitions. ROC all have bullish signs. Bollinger Bands and
Regression analysis both have bearish indicators
• In 2006, through the acquisition of Midwest alternatively.
Wireless Holdings, Alltel added Earnings Analysis:
approximately 450,000 wireless customers Negative: A negative third quarter earnings
and expanded its wireless operations in surprise coupled with negative analyst earnings
Minnesota, Iowa and Wisconsin. This revisions illustrates a bleak future outlook.
acquisition is already reflected in the price of Analyst Recommendations:
the security. Neutral: Hold recommendations have increased
over the past year. But outperform
• Alltel Corporation boasts largest network in recommendation is still the consensus from
United States covering 95 percent of the Reuters.
population. Institutional Ownership:
Neutral: Over past three months there were 15
• During 2006, Alltel signed a 10-year strategic fewer institutional buyers than sellers but 73,184
roaming agreement with Sprint Nextel more shares were purchased from individual
Corporation and extended its GSM roaming investors.
agreement with Cingular Wireless until 2012. Piotroski Analysis:
A positive sigh for the future of Alltel Neutral: The security had a P/B of 1.62 which
Corporation. places them in the 4th quintile (a value stock).
They received a Piotroski score of 6.
2. Company Summary
Alltel Corporation was founded in 1943 in Little Rock, Arkansas. Alltel Corporation is a customer-focused
communications company providing wireless, local telephone, long-distance, Internet and high-speed data
services to more than 15 million residential and business customers in 36 states. Alltel also owns and operates
on the largest wireless network in the United States. Alltel Corporation owns subsidiaries that help better
their customers needs in the Wireless and Wireline Telecommunication segments. Alltel Corporation
vigorously peruses the acquisition of competitors to better their position in major Telecommunications
market segments (i.e. wireless, local, and long distance). On August 1, 2005 Alltel merger with Western
Wireless Corporation and a year later sold off the company’s Australian subsidiary, Western Wireless
International Austria Corporation, to Deutsche Telekom AG. Over the past year Alltel has also pursued and
purchased First Cellular and Midwest Wireless Holdings, both of which helped better their wireless network
by giving them better access to potential customers.1 Alltel has various roaming agreements established with
other wireless companies that enables wireless coverage to more than 95 percent of the United States
population. During 2006, Alltel signed a 10-year strategic roaming agreement with Sprint Nextel Corporation
and extended its GSM roaming agreement with Cingular Wireless until 2012 (Alltel’s network runs using
CDMA). The Sprint roaming agreement provides voice and roaming and expands on Alltel's existing roaming
relationship with Sprint. In 2006 alone Alltel acquired 668.6 million in assets from mergers and acquisitions.2
Alltel Corporation has three main business segments: Wireless operations, Wireline operations, and
Communication Support services. In 2005, the revenue breakdown for the wireless, long distance, and
Communication Support divisions varied. Alltel provided wireless communications service to more than 10.6
million customers in 34 states. Wireless communications is Alltel’s largest division and accounted for 65% of
the operating revenues in 2005. The Company's wireline segment provides local telephone service to 2.9
million customers primarily located in 15 states. The wireline segment consisted of 24% of the total
operating revenues for Alltel in 2005. Communications support services consist of the Company's long-
distance and network management services, product distribution, directory publishing and
telecommunications information services operations. In 2005, revenues and sales from communications
support services consisted of 11% of Alltel's total operating revenues. 3
Competition and Strategy
In the wireless communications industry, four major competitors exist for Sprint Nextel. Cingular Wireless,
Verizon Wireless, T-Mobile, and Sprint Nextel all offer similar products and services as Alltel Corporation.
From a business aspect, Alltel looks to mergers and acquisitions to differentiate from competitors. Because
of their position in the wireless market (5th largest), Alltel often purchases smaller companies to better their
wireless equipment and technologies in an attempt them compete with their larger adversaries. In 2006,
through the acquisition alone of Midwest Wireless Holdings, Alltel added approximately 450,000 wireless
customers and expanded its wireless operations in Minnesota, Iowa and Wisconsin. 3 Furthermore, as stated
previously, because of roaming agreements with other companies, Alltel is able to offer wireless coverage to
more than 95 percent of the United States population. 4 Having a network that encompasses such a large area
of the United States is an important selling point to potential Alltel customers. Alltel’s constant pursuit of
growth helps differentiate their business strategies from competitors.
3. Alltel Corporation is also able to differentiate their products and services from competitors. Their introduced
of “my circle,” which allows Alltel customers to choose ten associates on any network (Cingular, Verizon,
Sprint, etc.)to talk to for free. Alltel has had the first mover advantage with this particular technology and has
benefited from it since 2005. Other areas of differentiation include Alltel’s strives to make sure every call
stays connected. Any call that is dropped on the Alltel network, earns you a one minute credit towards your
plan. Anyone who owns and operates a cellular phone on a regular basis understands how dropped calls can
affect your usage of minutes. This feature (which is only used by Alltel) helps alleviate the chance of overage
charges. Innovative features such as My Circle and credited calling keep customers happy and help attract
potential customers to Alltel Corporation.
It’s easy to say that a company’s products and services are differentiated from their competitors and that
these differentiations are beneficial to the company. Alltel has made positive strides over the past year both
from a business aspect and a product/services aspect. It is important to realize that these improvements in
revenues and sales can directly be attributed to the areas of differentiation that were covered above.
Revenues and sales increased 12 percent over 2005 driven by Alltel's continued focus on quality customer
growth, improvements in data revenues and Alltel's August 1, 2005 acquisition of Western Wireless
Historical Revenue and Earnings:
Historical Revenue Historical Earnings
FY 12/06 FY 12/05 FY 12/04 FY 12/06 FY 12/05 FY 12/04
1st Quarter 2,540 2,126 1,962 0.77 1.04 0.61
2nd Quarter 2,674 2,260 2,042 1.10 1.28 0.85
3rd Quarter 2,007 1,793 2,103 0.48 1.00 1.05
4th Quarter N/A 2,582 2,139 N/A 0.67 0.90
Total 7,221 8,761 8,246 2.35 3.99 3.41
Looking at the historical revenues and historical earnings for Alltel Corporation there are differing signals.
Historical revenues show increases of 19% in the first quarter, 18% in the second quarter, and 11% in the
third quarter over the past year, bullish indicators for the security. This is due in part to the acquisitions of
First Cellular and Midwest Wireless Holdings and the success that has resulted from these mergers. Historical
earnings, on the other hand, have decreased by 35%, 16%, and 108% respectively in the first, second, and
third quarters over the past year. Having decreases in historical earnings can be interpreted as a negative sign
for the security and a bearish indicator for the future. Overall, neutral signals are given at best when looking
at the historical revenues and historical earnings of Alltel Corporation.
4. I. Fundamental Valuation
Alltel Corporation PARAMETERS FY1 FY2 Ltg
EPS Forecasts 2.85 2.83 6.82% Model 1: 12-year forecasting horizon (T=12).
Book value/share (last fye) 33.89 and a 7-year growth period.
Discount Rate 10.78%
Dividend Payout Ratio 60.96%
Next Fsc Year end 2006
Current Fsc Mth (1 to 12) 11
Target ROE (industry avg.) 8.10%
Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Long-term EPS Growth Rate (Ltg) 0.0682 0.0682 0.0682 0.0682 0.0682
Forecasted EPS 2.85 2.83 3.02 3.23 3.45 3.68 3.94
Beg. of year BV/Shr 33.890 35.003 36.108 37.288 38.549 39.896 41.334
Implied ROE 0.081 0.084 0.087 0.089 0.092 0.095
ROE (Beg. ROE, from EPS forecasts) 0.084 0.081 0.084 0.087 0.089 0.092 0.095 0.092 0.090 0.087 0.084 0.081
Abnormal ROE (ROE-r) -0.024 -0.027 -0.024 -0.021 -0.018 -0.015 -0.013 -0.015 -0.018 -0.021 -0.024 -0.027
growth rate for B (1-k)*(ROEt-1) 0.000 0.033 0.032 0.033 0.034 0.035 0.036 0.037 0.036 0.035 0.034 0.033
Compounded growth 1.000 1.033 1.065 1.100 1.137 1.177 1.220 1.265 1.311 1.356 1.402 1.448
growth*AROE -0.024 -0.028 -0.026 -0.023 -0.021 -0.018 -0.015 -0.020 -0.024 -0.029 -0.034 -0.039
required rate (r) 0.108 0.108 0.108 0.108 0.108 0.108 0.108 0.108 0.108 0.108 0.108 0.108 0.108
discount rate 1.108 1.227 1.360 1.506 1.668 1.848 2.048 2.268 2.513 2.784 3.084 3.416
div. payout rate (k) 0.610
Add to P/B PV(growth*AROE) -0.02 -0.02 -0.02 -0.02 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01
Cum P/B 0.98 0.96 0.94 0.92 0.91 0.90 0.89 0.88 0.87 0.86 0.85 0.84
beyond current yr (Assume this yr's AROE forever) -0.20 -0.21 -0.18 -0.14 -0.12 -0.09 -0.07 -0.08 -0.09 -0.10 -0.10 -0.11
Total P/B (P/B if we stop est. this period) 0.78 0.75 0.76 0.78 0.79 0.81 0.82 0.80 0.79 0.77 0.75 0.74
Implied price 29.05 27.76 28.38 28.97 29.54 30.09 30.62 29.92 29.24 28.60 27.98 27.40
Beg. BV/Shr 33.89 35.00 36.11 37.29 38.55 39.90 41.33 42.87 44.42 45.97 47.53 49.08
Implied EPS 2.85 2.83 3.02 3.23 3.45 3.68 3.94 3.96 3.98 3.99 3.98 3.98
Implied EPS growth -0.007 0.068 0.068 0.068 0.068 0.068 0.006 0.004 0.002 0.000 -0.002
1. EPS Forecasts and long-term growth rate (LTG) were taken from www.reuters.com on November
2. Book value per share derived from the balance sheet offered by www.reuters.com. As of the fiscal
year end 2005, Alltel Corporation had $13,051,000,000 of equity and 384,000,000 shares outstanding,
giving a book value per share of $33.89 ($13,051,000,000/384,000,000).
3. The discount rate of 10.78% was determined using the Capital Asset Pricing Model (CAPM). A 20
year Treasury Bill rate of 4.80% (www.federalreserve.gov), a beta of 1.15 and an expected market
return of 10% were all used for this valuation. A market risk premium of 5.2% (.10-.0480) was also
used in the CAPM.
4. Dividend payout ratio was determined to be 60.95%, taken from www.reuters.com.
5. Next fiscal year-end for Alltel is December 2006.
6. Current fiscal month is November (11th month of fiscal year).
7. Target ROE equaled 8.10% acquired from www.reuters.com. It is the five year Wireless
Communications industry average.
Output and Sensitivity Analysis:
1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO
2. Changing the discount rate to 8% caused the EBO evaluation price to increase to $38.90. To get the
current price of $56.55 for Alltel Corporation, a discount rate of 5.8% must be used.
3. Changing the growth rate to 11% (an increase of 4.18%) causes an the EBO price to raise to $29.25,
an increase of $1.85 from the current EBO valuation price.
4. Lowering the industry ROE to 5% causes a decrease in the EBO price to $21.48.
5. II. Relative Valuation
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
VZ Verizon Communications Inc. 101.45 B 34.75 2.46 14.13 4.56% 3.10 2.19 13.44% 0.16 1.16
NTT Nippon Telephone Corp. 33.52 B 24.25 1.67 14.52 5.10% 2.85 1.11 4.53% 0.25 0.72
DT Deutsche Telekom AG 78.22 B 17.88 1.10 16.25 10.00% 1.63 1.25 -4.63% -0.27 0.99
BT BT Group PLC 45.03 B 54.20 4.14 13.09 6.60% 1.98 15.61 54.47% 0.29 1.18
AT Alltel Corporation 21.110 B 56.55 2.83 19.98 6.82% 2.93 1.61 14.71% 0.11 2.53
Implied Price based on: P/E PEG P/B Value P/S
VZ Verizon Communications Inc. $39.98 $59.79 $76.92 $84.19 $25.93
NTT Nippon Telephone Corp. $41.09 $54.95 $38.99 $126.60 $16.09
DT Deutsche Telekom AG $46.00 $31.37 $43.91 -$139.49 $22.13
BT BT Group PLC $37.05 $38.28 $548.29 $148.07 $26.38
High $46.00 $59.79 $548.29 $148.07 $26.38
Low $37.05 $31.37 $38.99 -$139.49 $16.09
Median $40.54 $46.62 $60.41 $105.40 $24.03
P/E Positive: Alltel Corporation’s P/E ratio is similar to their competitors, but lower. A
lower comparative P/E can be attributed to many factors. These factors include: the
risk level associated with Alltel, possible undervaluing of the security, or slower growth
for Alltel when compared to similar firms.
PEG (P/E/G) Neutral: Alltel Corporation has a PEG ratio that falls in the middle of the pack
comparatively. This is a strong indicator that Alltel Corporation may be fairly valued.
P/B Neutral: Alltel Corporation has a price to book ratio that is the middle value while
being compared to other similar companies. This helps further illustrate that Alltel
Corporation may be a fairly valued security.
Value (P/B/ROE) Positive: The value ratio for Alltel Corporation is second lowest at 0.11. This low
value ratio implies that the security may be undervalued. A low value ratio also
indicates that Alltel may be high risk comparatively.
P/S Negative: The price to sales valuation shows Alltel to be overvalued. Alltel
Corporation may have higher profit margins and lower risk than competitors, but it still
may be overvalued when looking at the price to sales valuation.
Summary Neutral: There are numerous positive and negative signs that come from looking at the
relative valuation for Alltel Corporation. The security boasted a strong P/E and value
ratio in which both had indicators of an undervalued security. Both the PEG ratio and
the price to book ratio had a neutral outlook with indications of a fairly valued security.
The price to sales ratio had the only negative outlook illustrating the security to be
currently overvalued by investors. After looking at all the positive and negatives from
the relative valuation, it appears the security is fairly valued and has a neutral outlook
when compared to similar Telecommunications companies.
6. III. Technical Analysis
7. Indicator Interpretation
Bollinger Bands Negative: The Bollinger bands are wide apart illustrating the recent volatility in the
price of Alltel Corporation. The current price is around the moving average, a neutral
sign for the security.
Stochastics Positive: Currently the divergence between %d and %k is two points, a neutral
indication. Alternatively, the line representing %k is currently under 80 percent and
above 20 percent indicating the security is neither overbought nor oversold, a positive
sign. Overall, stochastics show a positive outlook for Alltel.
Moving Averages Neutral: The short-term moving average is below the long-term moving average; this is
bearish. The current price is above both the short-term and long-term moving
averages, a positive sign for the stock. Alternatively, the gap is decreasing between the
current price and the moving averages which is a negative indicator for the security.
MACD Positive: The MACD is currently above zero and above the signal line. Having the
MACD above zero and above the signal line is a bullish indicator for Alltel
Regression Negative: The outlook for the line regression over the past 25 days is bearish because
of the negative slope of the line. Furthermore, the price is higher than the trend line
indicating the price will return toward the line soon; another bearish indicator for the
PriceROC Positive: Over the past 100 days the security price has an increasing slope and is
currently above zero; both are positive signals for Alltel. The only negative indicator is
the short run ROC which is heading in a negative direction.
8. IV. Earnings Analysis
August 2006 June 2006 March 2006 December 2006 August 2005
(Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior)
Estimate 0.63 0.89 0.78 0.82 0.86
Actual 0.60 0.93 0.82 0.77 0.90
Difference -0.03 0.04 0.04 -0.05 0.04
Mean Earnings Estimates
December 2006 March 2007 December 2006: December 2007: LT Growth
This Quarter Next Quarter This Fiscal Year Next Fiscal Rate
Earnings 0.58 0.66 2.85 2.83 6.82%
# Estimates 24 9 15 25 11
Earnings Per Share Estimates Revisions Summary
Last Week Last 4 Weeks
Revised Up Revised Down Revised Up Revised Down
Quarter ending 12/06 0 0 4 16
Quarter ending 3/07 0 0 3 4
Year ending 2006 0 0 5 16
Year ending 2007 0 0 5 17
Over the past five quarters, Alltel Corporation has seen both positive and negative earnings surprises.
Historically, the consecutive quarters ending March and June 2006 achieved positive earnings surprises of
0.04 respectively, a bullish sign for the security. Although, it is hard to be optimistic about Alltel after a
negative earnings surprise in August, given the current trend over the past five quarters, a positive earnings
surprise may come at the fiscal year end 2006.
If analysts are correct with estimates and Alltel Corporation has earnings per share of $2.85 for the fiscal year
end 2006, they will see a 32.55% increase in comparison to fiscal year end 2005. Having a positive earnings
per share increase is a very positive (bullish) sign for the security and can help create momentum. There are
many possible attributing factors that can help increase a stock’s EPS. For Alltel, it appears this EPS increase
can be partially attributed to Alltel’s spinning off of an unprofitable division in Alltel Holding Corporation in
the summer of 2006. Estimates show earnings per share to be down for the fiscal year end 2007 compared to
2006. Analysts estimate the security to be down 13% meaning at this point investors should not be
overreacting and selling the stock.
Over the last four weeks, analysts have revised down their earnings per share estimates for Alltel Corporation.
These estimate revisions include 20 total negative quarterly revisions and an astounding 33 total negative
yearly revisions. With so many negative revisions for the security, one can only assume that analysts see no
positive sign for the company in future months and years.
9. V. Analysts’ Recommendations
Current 1 Month Ago 2 Months Ago 1 Year Ago
Buy 9 10 9 9
Outperform 5 5 4 6
Hold 10 9 8 9
Underperform 0 0 0 0
Sell 1 0 0 0
No Opinion 0 0 0 0
Mean Rating 2.16 1.96 1.95 2.00
One year ago, analysts from www.reuters.com had a mean score of 1.96 for Alltel Corporation (1 Buy, 5 Sell).
Over the past year, the mean analyst average for the security has increased to 2.16. This indicates that
analysts are changing their minds about Alltel and recommending a hold more frequently than a buy which
can be interpreted as a bearish signal. Looking over the past year, buy recommendations have decreased
from ten to nine while hold and sell recommendations have increased by one respectively. Hold
recommendations have become the most frequent recommendation for Alltel Corporation as of current. All
of the changes in analyst recommendations illustrate a common negative (bearish) outlook for the security.
Interestingly enough, although the mean rating for Alltel has risen, the consensus recommendation is
outperform by www.reuters.com. This means that analysts believe the securities total revenues are going to
exceed the industry average by over 10%.1 Having outperform as a consensus recommendation by
www.reuters.com helps shed some positive light on an overall negative outlook in regards to analysts’
10. VI. Institutional Ownership
# of Holders % Beg. Holders Shares % Shares
Shares Outstanding 515,484,859 100.00%
Total Positions 662 97.78% 278,361,824 54.00%
New Positions 51 7.53% 6,743,275 1.31%
Soldout Positions 57 8.42% -9,101,496 -1.77%
Buyers 301 44.46% 31,887,342 6.19%
Sellers 316 46.68% -31,814,158 -6.17%
Beg. Total Inst. Positions 677 100.00% 278,288,640 53.99%
# Net Buyers/3 Mo. Net Chg. -15 -2.22% 73,184 0.01%
Over the past three months, Alltel Corporation has seen 15 fewer institutional buyers than sellers, a bearish
signal. Alternatively, institutions purchased 73,184 shares of Alltel from individual investors during this same
time frame, a bullish sign for Alltel. This presents mixed signals for the company because although there
were 15 fewer buyers than sellers, institutions that kept their position in Alltel acquired more shares over the
time period; a positive signal for the security. Institutions have some of the best research material available,
so a decrease in institutional ownership shows that investors are unsure about the future for Alltel and are
selling their position. Overall, a decrease in institutional ownership is a bearish sign for the security although
it is interesting to note that total institutional shares have increased even though institutional buyers have
11. VII. Piotroski Analysis
A. P/B ratio and quintile (1=growth, high P/B; 5=value, low P/B): Alltel Corporation has a price to book of
1.62 which is in the 4th quintile and considered a value stock.
B. Piotroski Score: 6
Piotroski Item Variable needed to compute Value Points
1. Positive net income TTM net income $1,168,100,000 1
2. Positive cash flow TTM cash flow $1,787,000,000 1
3. Earnings Quality 1
4. Decreasing Debt Debt/assets most recent ann figure 0.46 1
Debt/assets previous ann figure 0.78
5. Increasing working capital Current ratio most recent ann figure 1.82 1
Current ratio previous ann figure 1.11
6. Improving Productivity Asset turnover most recent ann figure 0.5 1
Asset turnover previous ann figure 0.5
7. Growing Profitability ROA most recent ann figure 2.09 0
ROA previous ann figure 2.35
8. Issuing Stock Shares outstanding most recent ann 352
Shares outstanding previous ann 306 0
9. Competitive Position Gross margin most recent ann 16.2% 0
Gross margin previous ann 16.4%
A Piotroski score of 6 is a moderate sign for Alltel Corporation. The valuation uncovered both positive and
negative signals for the company. Alltel Corporation had both a positive net income and positives cash flows
for the fiscal year end 2005 when compared to 2004. They also showed positive signs in their decreasing of
debt, increasing of working capital, and an ability to keep their productivity constant; all three of which are
positive signs for the security. Negative indicators came from decrease in profitability, increase in issuance of
stock, and a decrease in competitive position from 2004 to 2005. Although all three are bearish symbols,
having six positive indicators confirms that Alltel Corporation is moderately improving as a company and
may see further improvements in the future.