1. Read the case to get a sense of the industry trends and the strategic shifts occurring in the industry.
2. Analyze: 1. Trends in the industry 2. The financial statements of AT&T and its business segments 3. The financial statements of Verizon and its business segments
3. Compare the financial performance of each firm in terms of: 1. Financial statements: B/S and I/S 2. Business segments: Wireline vs Wireless
4. Based on your analysis of the financial statements and business segments, recommend the firm you believe would make the best investment. In other words, what should Diane Tagert recommend to Danagger Capital Management in terms of an investment?
Where to start:
I. Industry and Strategy
A. Overall, what are the trends in the wireless and wireline industry? B. What is the viability of the wireline segment of the industry? Will it eventually disappear?
B. How are industry changes impacting the business model of each firm? And, as a consequence, what is the strategy of each firm and is it appropriate against the background of the industry dynamics?
II. Segment Analysis: Assess the trends in the wireless and wireline segment of each business. Specifically, quantify and analyze the trend in the following:
A. Wireless Operating Results
1. Service revenue and equipment revenue: Average, percentage change and CAGR.
2. Revenue mix: Percentage of revenue accounted for by type of revenue.
3. Margin: Segment operating income margin and operating expense margin.
Questions to consider: Revenue Streams and Costs
1. Which revenue stream is growing or not growing?
2. What is the momentum?
3. Is the growth consistent with the firm’s strategy? If so, what are the implications? If not, what are the implications?
4. What does the trend in costs (Operating and Depreciation) imply operationally?
5. How do these trends relate to the trend in revenues?
6. What is the trend in the firm’s revenue mix? What does it imply?
7. How does the mix match up with the trend in revenues? What is the implication?
8. What is the trend in operating expenses margin and operating segment income margin? What is the operational implication?
B. Wireless Subscribers
Prepaid, Postpaid, Resellers, Connected and Total. Assess growth trends and momentum in each segment. Assess trend in Average Revenue Per User ( ARPU)
Questions to consider: 1. Which subscriber type is growing faster/slower? 2. Does the subscriber types match up with the firm’s strategy? What is the operational implication?
C. New Wireless Subscribers
Questions to consider: 1. Which subscriber type is growing faster/slower? 2. Does the subscriber types match up with the firm’s strategy? What is the operational implication? 3. Are there trends in New Subscribers that are consistent with the overall trend in subscribers? If so, does this trend support the firms’ strategy?
D. Total Churn Rate and Prepaid Churn Rate
Quantify and analyze the trend in the churn rate. Is there a difference between the trend in total churn rate versus the prepaid churn rate? What is the implication?
B. Wireline Segments: Similar to the Wireless Segment, quantify and analyze the wireline segment and the operational implication for the firm and its strategy.
Wireline Line Operating Results:
1. Service revenue and equipment revenue: Average, percentage change and CAGR.
2. Revenue mix: Percentage of revenue accounted for by type of revenue.
3. Margin: Segment operating income margin and operating expense margins
4. Analyze the connections: Broadband, Voice, Video and VOIP.
III. Financial Statement Analysis – Stand Alone Analysis
Analyze the financial statement for each firm.
A. Operational Efficiency and Profitability
– Analyze margins: COGS, Gross Profit, S, G&A , EBITDA, EBIT, and Net Profit
– ROE and ROA
– Analyze Asset Utilization and Efficiency: A/R turnover, Fixed Asset Turnover , Total Asset Turnover, A/P Turnover, Operating Cycle, etc.
B. Analyze Debt Capacity: Total Debt = S.T Debt+LTD+ Pension Obligations
– Total Debt /Total Equity, LTD/EBITDA, Total Debt/Total Assets
– Coverage: EBITDA/Interest, Cash& Cash Equivalents/Interest, Cash& Cash Equivalents/Short-term Liabilities
C. Free Cash Flow :
– Calculate the FCFF to the firm from 2010 to 2014. What is the trend? What are the drivers? What is the operational implication?
D. Return on Invested Capital (ROIC): Invested Capital = Short-term Debt+ Long Term debt + Deferred Taxes + Other Long-term Liabilities+ Post Retirement Obligations + Shareholders’ Equity
NOPAT = EBIT – Taxes. Thus, ROIC = NOPAT/Invested Capital
– Calculate the NOPAT and the invested capital for each firm from 2010 to 2014. What is the trend and the operational implication?
F. Calculate the firm’s ROIC from 2010 to 2014. What is the trend? Is the firm’s management deploying capital in an efficient way?
Summarize the financial performance of the firm in terms of the segment performance and it overall financial condition.
III. Financial Statement Analysis – Comparative Analysis
A. Compare the financial performance of each. Which firm is the better performer and better positioned given the trends in the industry? Comparison should discuss which firm is better positioned in the each segment (Wireless and Wireline) and on what basis – given the shifts in the industry?
B. What should Diane Tagert recommend to Danagger Capital Management in terms of an investment? Given your analysis of the industry shifts and both firms, please summarize your investment thesis.
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