Communication Services Sector Overview: Key Insights and Analysis
Explore the Communication Services sector overview, highlighting industry breakdown, top players, performance analysis, and sector traits. Gain valuable insights into Telecom, Media, and Entertainment industries within this sector.
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Presentation Transcript
Communication Services Sector Overview Brooks Reiber and Jack Reagan
Table of Contents 1. Industry Overview 2. Business Analysis 3. Economic Analysis 4. Financial Analysis 5. Valuation Analysis 6. Recommendation Communication Services
Industry Overview Sector Description The Communications Services Sector contains companies within the following industries Telecommunications Media & Entertainment The sector formed in 2018 as a combination of the Telecom industry and companies in the consumer discretionary and information technology sectors Sector Size Total Size: $2.639T Constituents: 26 Top Weight: 23.6% Top 10 Weight: 70.03% Key Players YTD Sector Performance 300 266.26 (39.96%) 250 Communication Services 200 150 159.85 100 50 0 Dec-21 Sources: Bloomberg (as of 10/27/22), Company Websites, Standard and Poor s Mar-22 Jun-22 Sep-22
Industry Overview Top Index Holdings(1) Company Meta Platforms Alphabet Inc. (Class A) Alphabet Inc. (Class C) Netflix Inc. AT&T Inc. T-Mobile US Inc. Charter Communications Inc. Walt Disney Company Comcast Corporation Twitter Weight 12.67% 11.86% 10.63% 5.5% 5.31% 5.09% 4.99% 4.85% 4.68% 4.45% Communication Services Sources: State Street (as of 10/27/22) (1) XLC Holdings
Industry Overview Sector Breakdown Industry YTD 1 Year Diversified Telecommunication Telecom (20.65%) (22.51%) Entertainment (37.12%) (43.35%) Media & Entertainment Interactive Media & Services (42.60%) (40.96%) Communication Services Media (36.20% (41.52%) S&P 500 (19.63%) (16.11%) Sources: Fidelity (as of 10/27/22)
Industry Overview High-Level Sector Traits Telecom Highly levered Low growth Healthy dividends Low competition Media & Entertainment High growth Asset-light Innovation Highly competitive Communication Services
Business Analysis Industry Life Cycle Analysis Communication Services Sources: Company Websites
Business Analysis Business Cycle Analysis Communication Services Sources: State Street
Business Analysis Porter's 5 Forces Degree Factor Barriers to Entry Low Customer loyalty, economies of scale Power of Suppliers Low Aggressive competition among key players Power of Buyers Moderate A desire for new, high-quality products Threat of Substitute Products High Improved product offerings frequently Communication Services Degree of Rivalry among competitors Globalizing economy increases competition for new customers High
Business Analysis Share of Global Advertise Spend by Medium Communication Services Sources: dentsu (2022)
Business Analysis Number of People Using Social Media Platforms Communication Services Sources: Statista (2022)
Business Analysis Communication Services Sources: Statista (2022)
Business Analysis Key Takeaways Overview: Sector consists of mix of growth (Media & Entertainment) and mature (Telecom) companies Extremely competitive industry, suppliers focused on consumer loyalty by improving product offerings; consumers hold buying power Business Models: Driven from advertisement revenue and the number of monthly active users (MAUs) MAUs have increased dramatically over the last decade, the total share of advertisement spending has increasingly shifted to digital platforms Business Cycle: Recessionary forces weighing on consumer are hurting companies' abilities to generate revenue through advertisements Weak consumers may choose to unsubscribe during these periods as services are non-essential Communication Services
Economic Analysis Correlation to Consumer Spending $350 12,000 $300 10,000 $250 8,000 $200 6,000 $150 4,000 $100 Communication Services 2,000 $50 $0 0 Jul-12 Jul-14 Jul-16 Jul-18 Jul-20 Jul-22 Comm Srvc Consumer Spending Sources: Bloomberg (as of 10/27/22)
Economic Analysis Correlation to Fed Funds Rate Communication Services Sources: Bloomberg (as of 10/27/22)
Financial Analysis EPS Expectations $16.00 $14.77 $14.00 $12.00 $10.00 $8.00 $6.00 Today $4.00 Communication Services $2.00 $0.00 Nov-12 Nov-15 Nov-18 Nov-21 Nov-24 Sources: Bloomberg (as of 10/27/22)
Financial Analysis Margins 70.00% 60.00% 57.02% 50.00% 40.00% 30.00% 19.04% 20.00% 10.00% 13.91% Communication Services 0.00% Nov-12 Nov-14 Nov-16 Nov-18 Nov-20 Gross Operating Net Sources: Bloomberg (as of 10/27/22)
Financial Analysis Key Takeaways The sector has stabilized its volatile earnings since the reshuffle in 2018 Analysts expect future EPS growth as technology offering expands and further globalizes Net Margins have remained steady through recent volatile markets Slight correlation between the sector s performance and consumer spending due to both factors connection to advertising spending However, consumer spending is also correlated to broader market performance, so this is not surprising Negative correlation with Fed Funds Rate Leading to strong dollar which hurts companies that seek revenue from abroad Communication Services
Valuation Analysis Price-to-Earnings Price-to-Sales 5.0 30.0 4.0 25.0 20.0 3.0 15.0 2.0 10.0 1.0 5.0 0.0 Nov-12 Nov-14 Nov-16 Nov-18 Nov-20 0.0 Nov-12 Nov-14 Nov-16 Nov-18 Nov-20 Comm Srvc S&P 500 Comm Srvc S&P 500 Price-to-Book Price-to-Cash Flow 5.0 20.0 4.0 15.0 3.0 Communication Services 10.0 2.0 5.0 1.0 0.0 Nov-12 0.0 Nov-12 Nov-14 Nov-16 Nov-18 Nov-20 Nov-14 Nov-16 Nov-18 Nov-20 Comm Srvc S&P 500 Comm Srvc S&P 500 Sources: Bloomberg (as of 10/26/22) (1) Star indicates a sector reshuffle in 2018
Valuation Analysis EV / EBITDA Multiples 14.0x 12.0x 10.0x 8.5x 8.0x 6.0x 4.0x Communication Services 2.0x 0.0x Nov-12 Nov-14 Nov-16 Nov-18 Nov-20 Sources: Bloomberg (as of 10/27/22) (1) Star indicates a sector reshuffle in 2018
Valuation Analysis EV / EBITDA Multiples 100.0x 180.0x 90.0x 160.0x 80.0x Netflix 140.0x 23.1x 70.0x T-Mobile 12.1x 120.0x 60.0x Google 11.9x 100.0x 50.0x AT&T 6.8x 80.0x 40.0x Meta 5.5x 60.0x 30.0x 40.0x 20.0x Communication Services 20.0x 10.0x 0.0x 0.0x Nov-12 Nov-14 Nov-16 Nov-18 Nov-20 AT&T Google T-Mobile Meta Netflix Sources: Bloomberg (as of 10/27/22)
Valuation Analysis Technical Analysis $280.00 $260.00 $240.00 $220.00 $200.00 $180.00 $160.00 Communication Services $140.00 $120.00 Jun-17 Jun-19 Jun-21 Price 50DMA 100DMA Sources: Bloomberg (as of 10/27/22)
Valuation Analysis Key Takeaways Valuation multiples substantially jumped in 2018 due to the sector reshuffle Media & Entertainment companies trade at a premium to financial metrics because it is a higher growing industry The Communication Services sector currently trades at 8.5x EV/EBITDA The sector is comprised of two industries: Telecommunications and Media & Entertainment Media & Entertainment trade at much higher multiples than the telecommunication industry, so there are vast discrepancies when valuing the industry as a whole Communication Services
Recommendation S&P 500 Weight: 8.07% SIM Weight: 8.27% Current Allocation: SIM 0.20% Overweight Recommendation: We suggest a SLIGHT OVERWEIGHT because the overall performance of the sector YTD has been extremely poor suggesting that it may not be trading on fundamentals. Additionally, the Federal Reserve may pivot sooner than later and as we have learned, the performance of this sector relates to this rate. We view this as buying at a discount. The Telecom industry is a defensive play given strong dividend yields, but high leverage and declining sales justify an UNDERWEIGHT assignment within the sector The Media & Entertainment industry will likely experience near term headwinds due to slowing advertising and consumer spending, but we believe these factors are priced in, and the industry is attractively valued, leading to an OVERWEIGHT call Communication Services Sources: Class Resources (as of 9/30/22)
