Alltel Corporation 3


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Alltel Corporation 3

  1. 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 are still giving outperform Relative Valuation: 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. 1
  2. 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. 1 2 3 Ibid 4 Ibid 2
  3. 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 Corporation.1 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. 1 3
  4. 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 Add: Perpetuity 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 Check: 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 Inputs: 1. EPS Forecasts and long-term growth rate (LTG) were taken from on November 21, 2006. 2. Book value per share derived from the balance sheet offered by 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% (, 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 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 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 valuation $27.40. 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. 4
  5. 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 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 Indicator Interpretation 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. 5
  6. 6. III. Technical Analysis 6
  7. 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 Corporation. 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 security. 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. 7
  8. 8. IV. Earnings Analysis Earnings Surprises 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 Year 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. 8
  9. 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 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 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 helps shed some positive light on an overall negative outlook in regards to analysts’ recommendations. 9
  10. 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 decreased. 10
  11. 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% Total 6 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. 11