Teleconomy 2009 Wireless Update

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Rating Target Price

Current Year Earnings Estimates

Next Year Earnings Estimates

Ticker Old New Old New Old New Old NewAMT 1H 1H US$37.00 US$37.00 US$0.59 US$0.59 US$0.79 US$0.79S 2S 2S US$4.00 US$4.50 US$-0.57 US$-0.42 US$-0.61 US$-0.40VZ 1H 1H US$35.00 US$35.00 US$2.47 US$2.47 US$2.68 US$2.68

North America Telecommunications Services - Wireless (Citi)

Multi-Company

30 March 2009 23 pages

Teleconomy 2009 – Wireless Update Shrinking Postpaid Volumes in 1Q Poses New Risk to the Wireless Sector; 1Q Update & CTIA Preview

Postpaid Net Adds Poised to Shrink in 1Q, While Prepaid Should Gain — We believe industry postpaid net adds may shrink to ~1 mil. in 1Q/09 (down 50% q/q) with larger sequential losses for S to (1.15)mil & solid, albeit lower, gains for VZ & T. Prepaid/Pre-pay categories should do better in 1Q, but sequentially higher net add volumes may include double-counting as inter-carrier competition heats up from wider unlimited rate plan availability for $50 or less.

Sprint Boosts 1Q Prepaid Performance, as Postpaid Units Erode — We have raised our near-term OIBDA forecasts for S to reflect the booster shot from pushing its iDEN unlimited prepaid, although we now expect worse CDMA & overall postpaid trends for 1Q that could derail Sprint’s restructuring potential if CDMA postpaid losses continue for an extended period. We expect the stock to trade within a $3-4 range in the near term and have raised our target to $4.50.

Leap & Metro May Face 2Q Headwinds — The stocks have rebounded an avg. of ~45% over the last 4-5 weeks on positive 4Q results and the anticipation of strong 1Q net add results that could outperform our ests. We believe concerns will rise again for both net add volumes and ARPU performance after 1Q results are pre-released and heading into the 2Q results season, as competition increases within the prepaid & unlimited segments, including from Boost, that could lead to a 10-15% pull-back in their share prices over the next three months.

Prefer American Tower with a Buy Rating — We remain a buyer of AMT as the best positioned to benefit from a combination of solid fundamental site colocation trends from investments in mobile data services & potential to use its balance sheet to improve returns for shareholders over time.

Michael Rollins, CFA +1-212-816-1116 [email protected]

Kevin Toomey [email protected]

David J Mittan [email protected]

Corporate Bond Research

David Hamburger +1-212-816-0442 [email protected]

See Appendix A-1 for Analyst Certification and important disclosures.

Teleconomy 2009 – Wireless Update 30 March 2009

Citigroup Global Markets 2

We expect slowing 1Q/09 net adds both sequentially and on a year-over-year basis, while postpaid sales are likely to fall below 25% of industry net adds to roughly 1 million, which is nearly a 50% sequential drop from the 4Q levels and marks a new low in the industry’s recent history. We believe the shrinking postpaid volumes coupled with growing competitive intensity within the prepaid/pre-pay service category poses greater risk to voice pricing within the industry,

Revisiting 1Q Expectations and Previewing

CTIA

As the first quarter is about to conclude, we wanted to:

1. Revisit our subscriber expectations for the first quarter that show a continued slowdown in unit growth with a lower proportion originating from higher-value postpaid subscriptions;

2. Review our Buy-rated thesis on American Tower, which we believe retains the potential for further share price upside from a combination of: 1) solid site colocation demand from carriers; 2) opportunistic reinvestments in acquisitions and business plan extensions; 3) further balance sheet flexibility that should lead to some level of share repurchase activity even in ’09. We believe AMT has the capacity to reinvest and/or return 22% of its market cap to shareholders through 2011 at 3x net debt leverage (relative to OIBDA) and roughly 40% if it increases leverage to the mid-point of its target leverage ratio range at 5x; and

3. Preview our expectations from the upcoming annual wireless industry trade

show, CTIA, with our Citi-hosted meetings beginning on Tuesday and extending through Thursday,

Bottom line, as we approach the annual wireless industry trade show hosted by CTIA, we believe sector fundamentals remain at risk over the next 12-24 months as competition is swelling within the pre-pay and prepaid voice markets that may eventually lead to further price deflation for traditional postpaid and family plan products over time.

We prefer American Tower as a beneficiary of capital investment trends for data services, while slowing industry postpaid volume remains a significant risk to Sprint’s restructuring efforts for its postpaid CDMA segment and we expect the share price to trade within the $3-4 range over the next few months in the absence of meaningfully improving its postpaid CDMA results.

We are becoming more concerned about the near-term sustainability of the recent price performance for Leap (LEAP.O; US$36.54; 2S) and MetroPCS (PCS.N; US$17.52; 2S), following their recent rally averaging 45% over the last 4-5 weeks on the anticipation of strong 1Q net add results. We recognize the faster market launches in 4 major cities between the two companies can produce some upside potential in 1Q results and lead the stocks to have some support into early April, at which point we expect both to pre-release net add results or at least provide some positive indications of performance at the upcoming CTIA industry trade show. We expect net add volumes for both Leap and MetroPCS will face sequential pressure during 2Q/09 from greater competition, including from Boost Mobile, and unfavorable seasonality, that could lead to a pull-back of 10-15% over the next three months.

Shrinking Postpaid Volumes Poses New Risk to the Wireless Sector



We believe the scale and retention benefits of family plan pricing should allow Verizon and AT&T (T.N; US$26.00; 2H) to hold onto to a decent level of postpaid net adds over the course of ‘09, although longer-term risks remain for both with the slowdown in industry unit growth. We prefer Buy-rated Verizon (relative to Hold-rated AT&T) with opportunities for Verizon to produce better earnings growth over the next few years from acquisition-related synergies through Alltel, improving scale from its FiOS platform in the consumer segment, and the potential for incremental cost cutting over time.

Expect 1Q Results to Highlight a Further Slowdown in Postpaid, as Prepaid Becomes the New Battleground Our latest round of channel checks suggest that postpaid wireless growth will likely slow to 3.5 million net adds from 4.2 million in the fourth quarter ’08 and 4.0 million net adds in the year-ago period. However, we expect postpaid net additions to fall from almost 2.0 million in 4Q to around 1.0 million in 1Q, leaving the remaining volumes comprised mostly of prepaid and pre-pay services to rise to 2.5 million during 1Q/09 from 2.3 million in the year ago period and 2.1 million in 4Q/08. We believe significant new market growth and competition may be inflating near-term results with a double-counting effect to the extent that new unlimited competition is causing inter-carrier churn that takes time to reflect in net add and ending subscriber results. We still expect revenue gains in data to be largely offset by lower voice ARPU contributions by subscribers, while cash flow results will depend on the industry’s ability to remain disciplined on marketing spend as industry customer growth continues to slow.

More concerning, however, Sprint and T-Mobile, a wholly-owned subsidiary of Deutsche Telekom (DTEGn.DE; €9.26; 2M) may show a further deterioration in postpaid net additions based on our recent channel checks and industry analysis. We see both companies incrementally focusing on products within the sub-prime credit category, such as Boost Unlimited for Sprint, and continued sales of T-Mobile’s Flex Pay service that loosens credit requirements in exchange for payments up-front for the service. Stronger prepaid and pre-pay services for Sprint in the quarter that we now estimate at a positive 500k may surprise some, although we still believe the key to restructuring Sprint successfully is to repair the postpaid CDMA segment for which we unfortunately expect sequential erosion in net subscriber trends during 1Q. We believe further deterioration in the sales productivity for higher-quality postpaid services for both companies may lead both Sprint and T-Mobile USA to get more aggressive on postpaid service pricing or promotional acquisition costs.

Bottom line, first-quarter results represent an inflection point for slower overall postpaid growth and greater prepaid unit sales. These trends are likely to cause competitive reactions and responses over the next six months that places the industry at greater risk for revenue growth in the 2010 timeframe.

We highlight the following take-aways:

Sprint Turns to Prepaid for Subscriber Gains as Postpaid Losses Are Likely to

Worsen Sequentially in 1Q/09 – Our latest round of industry channel checks suggests that Sprint’s postpaid losses are likely to rise from 4Q levels to (1.15) million, although the focus on Boost Unlimited and cost cutting may lead to better OIBDA and free cash flow generation over the course of ’09. The move to “Re-Boost” the iDEN platform with cash flow from the unlimited business model is constructive to near-term valuation support and the perceived liquidation value for the iDEN business unit, in our view, but fails to address the consistent challenge of fixing the postpaid CDMA platform, which we believe is necessary to create a runway for longer-term value creation.

We now forecast 1Q postpaid net losses

for Sprint of (1.15) million from (1.10)

million previously, while we believe T-

Mobile USA is at risk of only adding

around 525k based on our top-down,

bottoms-up analysis of net add

subscriptions for 1Q vs. our published

estimate of 775k.



With better cash generation, we believe Sprint can support the recent run-up in the stock on a 12-month view, although the failure to show sequential improvement in the rate of postpaid net losses and more importantly postpaid CDMA net losses raises the risk profile for long-term value creation. We have raised our postpaid net loss estimate to (1.15) million, while we have raised our prepaid gains to a strong 500k on the heels of strong take-up of its national Boost unlimited service. Given our expectation for further erosion in its postpaid CDMA segment during 1Q/09, we believe share price appreciation remains somewhat limited at the current level and could reconsider the prospect for a short-term trade into the seasonally stronger 2Q from a metrics perspective at lower levels for the share price given the potential benefits from cost cutting and buzz regarding the Palm Pre, for which we hope to receive more details at CTIA regarding price points and product launch dates.

Risk Profile Rising for Leap and MetroPCS – Leap and MetroPCS both produced solid 4Q results and provided upbeat commentary for subscriber net additions coincident with new market launches that occurred earlier than we expected across a cumulative 31.7 million people principally in Boston (MetroPCS), Chicago (Leap), New York (MetroPCS), and Philadelphia (Leap).

We have received questions as to whether or not broader unlimited carrier competition is growing the market for these type of services given the seemingly simultaneous success of Sprint’s Boost products coupled with new market launches by Leap and Metro, whereas we believe the near-term double-counting of subscriptions may be the explanation that raises a caution flag for 2Q/09 subscriber churn and net add results.

We anticipate that Leap and MetroPCS are poised to recognize strong net add growth from new market launches and seasonally strong performance in their expansion markets, which we believe investors have been partly anticipating given their recent share price outperformance. We estimate Leap will add 430k customers during 1Q/09 and believe the earlier launches of Philadelphia and Chicago coupled with the recent up-tick in adds from older markets could put net adds into the 500-550k range under a more optimistic-case scenario. For Leap, the broadband segment offers the potential for some additional near-term growth, as well.

We forecast MetroPCS will add 500k net adds during 1Q/09 and recognize that the faster launches in New York and Boston coupled with favorable seasonality could put adds in the 600k-650k range under a more optimistic-case scenario. Our optimistic-case scenario recognizes that they have the potential for seasonal strength given that gas prices have remained low and 1Q adds can outperform 4Q with the help of tax rebate season.

While we cannot discount the potential for some category growth with multiple unlimited competitors in the market, we believe Sprint’s plans for an aggressive Boost push in 2Q will start to create net add risk for Leap and Metro in the coming quarters. We also believe Sprint’s recent launch may lead Leap and MetroPCS to revisit recent decisions to try to stem the decline in ARPU. While both Leap and Metro can support stock prices near current levels based on our 12-month targets, we believe the risk to ARPU and net add expectations beginning with second quarter results may cause both stocks to retreat 10-15% over the next three months after 1Q net add results are released (or indicated), especially as we do not expect the two companies to more aggressively pursue a merger scenario with each other. Further strength in the share prices of Leap and PCS in the absence of materially better growth over the next 12 months could lead us to revisit our thesis on the shares.



Solid, Albeit Lower, 1Q/09 Net Adds Expected from Verizon and AT&T – We expect solid net add performance from Verizon (total net adds raised from 800k to 1.1 million) and AT&T (maintaining estimate of 1.2 million) during the quarter, albeit significantly slower than the year ago period. Both companies combined should generate over 160% of the industry postpaid net adds of around 1.0 million, as we expect further share gains principally through postpaid family plans and some modest prepaid/wholesale volumes. The declining postpaid volumes for the industry emphasize the need for AT&T and Verizon to refocus efforts on the prepaid platform given that we believe will challenge Leap and Metro to retain the level of net add momentum experienced through their new market launches.

Slowing T-Mobile USA Adds May Lead to a Stronger Competitive Response –

We believe T-Mobile USA is likely to report slower net subscriber growth that we believe is at risk of being around 525k in the quarter versus our published estimate of 775k. We believe postpaid net adds for T-Mobile USA are at risk of remaining in the 200k-300k range, as the company is targeting churn reduction through its $50 unlimited voice plan that is reserved for current customers only. We believe the next inflection point for T-Mobile USA is whether or not the company can revive gross adds under its current rate plan structure through a more aggressive 3G push during the second and third quarters of ’09, as it completes its network upgrade and broadens its product portfolio. We believe failure to organically improve market share will lead to greater postpaid price aggression given the company’s marketing platform that: 1) has historically emphasized value leadership in the past; 2) has already loosened its credit criteria for new subscriptions through Flex Pay; 3) has offered aggressive retention plans for customers to target churn reduction; and 4) has already widened its selection of attractively-priced 2G and 3G devices.

American Tower Remains our Preferred Buy-Rated Pick within the Wireless Sector We remain upbeat on Tower fundamentals as carrier capital spending trends look better at closer to flat spending excluding Sprint versus our initial assessment of down 10-15% during 2009, while we believe the pending upgrades to 3G and 4G services should fuel solid colocation revenue growth through 2011. We believe American Tower retains one of the strongest balance sheets with a staggered maturities schedule and a balance sheet that is significantly less levered than its current peers SBAC (SBAC.O; US$23.90; 2S) and Crown Castle (CCI.N; US$21.57; 2S). The company continues to use its positive free cash flow and current cash position to opportunistically reinvest in assets, including its recently announced acquisition to expand in India. American Tower is also pursuing new business model extensions such as shared backup power generation and indoor/outdoor distributed antenna systems (DAS) with only a limited amount of capital at risk in the hopes of creating some incremental revenue growth contributors on a five-year view.

While remaining opportunistic for future growth vehicles from acquisitions and business extensions, we still see the balance sheet as the company’s greatest opportunity to create value with an opportunity to reinvest and/or repatriate to shareholders around 40% of its market capitalization through 2011 to the extent the company can return to the mid-point of its unchanged leverage target range of 5x OIBDA versus its peers at an average of 6% over the same period as shown in Figure 1. If leverage remains on the decline towards 3x OIBDA, AMT would have capacity to return 22% of its market capitalization over the same period through 2011.



Figure 1. Percent of Market Capitalization Available to Reinvest or Repatriate to Shareholders Through 2011 At Varying Leverage Ratios

Leverage Peer Average

40% AMT CCI SBAC.O Ex AMT

3.0x 22% -22% -23% -23%4.0x 31% -7% -10% -8%5.0x 40% 8% 3% 6%6.0x 49% 24% 17% 20%7.0x 58% 39% 30% 35%

Company

Source: Company Reports and CIRA Estimates

CTIA Likely to Focus on Finding New Revenue Opportunities as Unit Growth Slows We estimate that the wireless sector exited 2008 with 270 million subscriptions, representing an 88% penetration of the U.S. population and generated roughly $154 billion in recurring service revenue. Further, we estimate that the wireless sector represents an impressive 40% of Telecom industry revenue (with equipment revenue contributing an incremental 5% of industry revenue). More impressive, we estimate that the mobile broadband arena will generated more than $33 billion during 2008 (over 21% of wireless revenue and around 9% of Telecom revenue) and is now surpassing High Speed Internet revenue from both Telco and Cable MSOs with annualized 4Q08 mobile broadband revenue of over $36 billion.

With unit growth slowing that is likely being exacerbated by a tough economy, we believe carriers will be focusing investor attention on evolving the industry to take advantage of the high percentage of people carrying devices through advertising opportunities, while also trying to take advantage of the expansion of expanded mobile data service footprints through wireless-embedded products. The challenge for the industry rests with the uncertainty within the competitive environment created by 2 national carriers that have not reached their full-scale potential (T-Mobile USA and especially Sprint, which is donating postpaid market share currently to its competition), some remaining regional providers such as U.S. Cellular that will face increasing competitive challenges as an independent operator, and new insurgent business models from a combination of Leap and MetroPCS. The expansion of Clearwire’s mobile data buildout also adds the risk of price deflation for mobile broadband services.

While wireless should remain a net beneficiary of share gains from voice and data services over time, we believe the propensity to gain a much larger revenue stream for such opportunities could be diluted by the economy in the short-run and the competitive environment over the long-run.

The other important take-away is that the need to build and compete with national scale for broadband data services is likely to fuel a solid rate of investment into wireless infrastructure and result in higher site colocation payments to tower companies over time. We believe the Tower stocks retain the best medium- and long-term fundamentals to benefit from these trends, while the risk remains national carrier consolidation, which we view as a low-probability event over the next 12 months. We remain a buyer of American Tower as the best positioned to benefit from a combination of the fundamental site colocation trends and opportunity to use its balance sheet to improve returns for shareholders over this period.



We highlight the following themes we will watch for at CTIA:

National Carriers Likely to Kindle the Data Opportunity – We expect carriers such as AT&T and Verizon to target the market for inanimate devices, after seeing the early success of the Kindle on the Sprint network. Although we believe payments are quite low for activation and per-use downloads, the opportunity to embed devices and get paid without having to invest in marketing and sales is increasingly important as the industry matures, in our view. We expect carriers to share incremental data points on trials with mobile services attached to cars with services such as OnStar and describe opportunities to pursue inanimate devices, such as meter readers. We have heard about the possible revenue opportunities for these types of applications dating back to when 2-way paging networks were looking to fill their capacity in the late-90s. Roughly 10 years later, we believe the stars could finally be lining up to sell mobile data services for non-subscriber devices for a variety of applications to improve resource efficiency and reduce cost given the strides made with respect to network coverage and declining device costs.

Still Searching for Meaningful Mobile Ad Revenue – With some initial agreements formed, albeit with few details that followed, we believe both mobile carriers and Internet search engines share a greater incentive to work together at creating a successful ecosystem for advertising and search services given the larger availability of wireless devices with data functionality. The advent of Touch screen devices is facilitating greater data consumption by customers, according to some recent data points from industry researchers, which could lead to material revenue generation from these opportunities within the next 1-2 years. We will continue to watch for more details.

Re-Tooling for the Next or Last 10% Penetration – We believe an increasingly popular point of discussion at the conference will be how much penetration is left given that around 14% of the population is below the age of 10 years old (defined by the Census Bureau as between the age groups of 0-9 years). With 88% penetration and some double-counting of devices through prepaid and multiple-device adoption, we suspect real people penetration is somewhere around 80%, which still suggests we are nearing maturity with respect to people penetration. Hence, we believe carriers will need to increasingly focus on prepaid given the swelling of competition for sub-prime customers in a tough economy and for multiple devices to try to size the incremental data revenue opportunity for investors.

Capital Trends With Emerging 4G Technologies – We believe the timing of 4G launches will be a key focal point given Clearwire’s push to launch WiMAX over the next 24 months and Verizon’s push to reach 80-100 million people with its 4G version of LTE (a standard we expect to be more widely adopted than WiMAX around the globe). Leap Wireless is offering unlimited mobile broadband in its local markets for only $40 per month, which we believe is highly aggressive and runs the risk of deflating the revenue opportunities for the national carriers over time. We believe capital spending on voice services should moderate with volumes, while we still expect carriers to focus on coverage enhancements and data service upgrades more aggressively in response to any voice savings.

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Figure 2. Summary of Wireless Industry Forecasts ($ in millions, except subscriber data in 000s and operating metrics in $)

1Q/08E 2Q/08E 3Q/08E 4Q/08E 1Q/09E 2Q/09E 3Q/09E 4Q/09E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Total Service Revenues 37,074 38,760 39,187 38,918 38,852 40,535 40,865 40,481 131,678 145,167 153,940 160,733 167,781 174,294 180,281 186,711 192,741 198,442

% Growth 8% 6% 5% 5% 5% 5% 4% 4% 12% 10% 6% 4% 4% 4% 3% 4% 3% 3%Operating Cash Flow BMS 19,911 21,350 21,540 21,007 20,888 22,350 22,485 21,874 71,989 79,693 83,808 87,597 91,927 95,099 97,955 101,448 104,724 107,822

OCF BMS Margin 54% 55% 55% 54% 54% 55% 55% 54% 55% 55% 54% 54% 55% 55% 54% 54% 54% 54%Incr. OCF BMS Margin NM 85% 45% 198% 180% 87% 41% 159% 59% 57% 47% 56% 61% 49% 48% 54% 54% 54%

Operating Cash Flow 13,040 14,493 14,258 13,868 13,506 15,397 15,568 14,838 46,844 53,128 55,659 59,309 62,943 65,206 67,500 69,158 70,574 71,687OCF Margin 35% 37% 36% 36% 35% 38% 38% 37% 36% 37% 36% 37% 38% 37% 37% 37% 37% 36%% Growth 7% 1% 4% 7% 4% 6% 9% 7% 17% 13% 5% 7% 6% 4% 4% 2% 2% 2%

Operating Income 7,619 8,973 8,638 8,150 8,131 9,924 9,997 9,169 25,971 30,655 33,380 37,222 41,141 43,684 46,253 48,184 49,868 51,245Operating Income Margin 21% 23% 22% 21% 21% 24% 24% 23% 20% 21% 22% 23% 25% 25% 26% 26% 26% 26%% Growth 14% 2% 8% 14% 7% 11% 16% 13% 25% 18% 9% 12% 11% 6% 6% 4% 3% 3%

Total Capital Expenditures 4,872 5,592 5,504 6,383 4,600 6,050 5,450 6,000 25,000 22,119 22,351 22,100 22,500 22,200 22,500 22,000 21,500 21,000

Key Mobile Statistics

1Q/08E 2Q/08E 3Q/08E 4Q/08E 1Q/09E 2Q/09E 3Q/09E 4Q/09E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Total Ending Subscribers (000259,128 262,528 266,228 270,428 273,928 277,128 279,828 284,028 233,041 255,128 270,428 284,028 297,228 309,628 321,228 332,128 342,328 352,078

% Growth 8% 8% 7% 6% 6% 6% 5% 5% 12% 9% 6% 5% 5% 4% 4% 3% 3% 3%Gross Adds 19,273 17,954 19,007 19,173 19,667 18,574 18,824 19,932 78,632 79,299 75,408 76,997 80,509 83,038 85,789 89,695 93,563 97,662Net Adds - Internal (000s) 4,000 3,400 3,700 4,200 3,500 3,200 2,700 4,200 25,145 22,087 15,300.0 13,600.0 13,200.0 12,400.0 11,600.0 10,900.0 10,200.0 9,750.0% Monthly Churn 2.0% 1.9% 1.9% 1.9% 2.0% 1.9% 1.9% 1.9% 2.0% 2.0% 1.9% 1.9% 1.9% 1.9% 2.0% 2.0% 2.1% 2.1%POPS (MM) - Consolidated 304.1 304.9 305.7 306.4 307.2 308.0 308.7 309.5 300.4 303.4 306.4 309.5 314.0 318.5 323.2 327.8 332.6 337.4Penetration (%) 85.2% 86.1% 87.1% 88.3% 89.2% 90.0% 90.6% 91.8% 77.6% 84.1% 88.3% 91.8% 94.7% 97.2% 99.4% 101.3% 102.9% 104.3%% Covered POPS (MM) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Minutes 647,963 665,112 682,096 700,337 685,889 702,597 718,474 735,833 1,992,359 2,206,911 2,695,507 2,842,792 3,201,179 3,396,784 3,587,897 3,774,665 3,957,268 4,136,818MOUs 840 850 860 870 840 850 860 870 755 755 855 855 918 933 948 963 978 993Total Service Revenues 37,074 38,760 39,187 38,918 38,852 40,535 40,865 40,481 131,678 145,167 153,940 160,733 167,781 174,294 180,281 186,711 192,741 198,442

% Growth 8% 6% 5% 5% 5% 5% 4% 4% 12% 10% 6% 4% 4% 4% 3% 4% 3% 3%ARPU Total ($) $48.06 $49.53 $49.41 $48.35 $47.58 $49.04 $48.91 $47.86 $49.89 $49.64 $48.84 $48.35 $48.11 $47.87 $47.63 $47.63 $47.63 $47.63

% YOY Change (1.2%) (2.1%) (1.9%) (1.2%) (1.0%) (1.0%) (1.0%) (1.0%) (1.0%) (0.5%) (1.6%) (1.0%) (0.5%) (0.5%) (0.5%) 0.0% 0.0% (0.0%)Operating Cash Flow BMS 19,911 21,350 21,540 21,007 20,888 22,350 22,485 21,874 71,989 79,693 83,808 87,597 91,927 95,099 97,955 101,448 104,724 107,822

OCF BMS Margin 54% 55% 55% 54% 54% 55% 55% 54% 55% 55% 54% 54% 55% 55% 54% 54% 54% 54%Operating Cash Flow 13,040 14,493 14,258 13,868 13,506 15,397 15,568 14,838 46,844 53,128 55,659 59,309 62,943 65,206 67,500 69,158 70,574 71,687

OCF Margin 35% 37% 36% 36% 35% 38% 38% 37% 36% 37% 36% 37% 38% 37% 37% 37% 37% 36%% Growth 7% 1% 4% 7% 4% 6% 9% 7% 17% 13% 5% 7% 6% 4% 4% 2% 2% 2%

Cash Cost per Sub. ($) $22 $22 $22 $22 $22 $22 $22 $22 $23 $22 $22 $22 $22 $22 $22 $22 $22 $22CPGA ($) $356 $382 $383 $372 $375 $374 $367 $353 $320 $335 $373 $367 $360 $360 $355 $360 $365 $370OCF/Sub. ($) $17 $19 $18 $17 $17 $19 $19 $18 $18 $18 $18 $18 $18 $18 $18 $18 $17 $17

Source: CTIA, US Census Bureau, Company Reports and CIRA Estimates



Sprint Nextel (S) Targeting Prepaid Boost to Help Ease Revenue Pressure From Postpaid Losses; Maintain Hold Sprint Boosts Prepaid Performance, as Postpaid Units Erode — We have

raised our near-term OIBDA forecasts for S to reflect the booster shot from pushing its iDEN unlimited prepaid, although we now expect worse CDMA & overall postpaid trends for 1Q that could derail Sprint’s restructuring potential if CDMA postpaid losses continue. We raised our Sprint target price to $4.50 from $4, while we expect the stock to trade within $3-4 range in the near term. We have also revised our forecast to reflect a greater percentage of it targeted cost cutting efforts hitting the OIBDA line during 2009.

Expect Larger CDMA Postpaid Net Subscriber Losses in 1Q/09 — We expect Sprint to lose (566k) within its postpaid CDMA base, which represents a sequential erosion in performance relating to slower industry growth and may infer its restructured advertising programs are not providing the intended lift in gross adds or reduction in postpaid churn. We believe fixing the postpaid CDMA segment needs to remain the top priority to stabilize and improve the company’s long-term value proposition.

Focus on iDEN Has Mixed Strategic and Competitive Implications — We agree with Sprint’s strategy to try to improve cash flow from its iDEN network, which has substantial excess minute capacity, although believe the unlimited rate plan strategy runs the risk of further of cannibalizing revenue from some of its own customers and prompting a competitive reaction on either price or handset promotions from its unlimited competitors and possibly T-Mobile USA, especially as industry postpaid net adds slow.

Boost Focus May Help iDEN Value — We believe the unlimited strategy could add or shift value to its iDEN network, which still retains roughly $5.4 billion face value of debt, as we now estimate iDEN OIBDA can remain in the $700-900 million range through 2012. We remain concerned, however, that the iDEN segment may still not be worth the face value of its debt given our concerns over the risks associated with the sustainability of its unlimited strategy, including capacity of the network and handset availability.

Maintain Hold — We believe Sprint needs to show a path for revenue growth in the CDMA franchise to support a substantially higher valuation on a stand-alone basis and to create a better runway for recurring free cash flow as capital spending levels may eventually need to rise from current levels.

Company Focus

Hold/Speculative 2SPrice (27 Mar 09) US$3.96Target price US$4.50

from US$4.00 Expected share price return 13.6%Expected dividend yield 0.0%Expected total return 13.6%Market Cap US$11,345M

Price Performance (RIC: S.N, BB: S US)

EPS Q1 Q2 Q3 Q4 FY FC Cons

2008A 0.04A 0.06A 0.00A -0.01A 0.09A 0.09A

2009E -0.10E -0.07E -0.09E -0.16E -0.42E -0.22E

Previous -0.13E -0.11E -0.12E -0.20E -0.57E na

2010E na na na na -0.40E -0.23E

Previous na na na na -0.61E na

2011E na na na na -0.54E -0.24E

Previous na na na na -0.61E na

Source: Company Reports and dataCentral, CIR. FC Cons: First Call Consensus.

Target price change

Estimate change



American Tower Corp (AMT) Reviewing Our Buy-Rated Thesis Reiterate Buy — We believe AMT retains the potential for further share price

upside from a combination of: 1) solid site colocation demand from carriers; 2) opportunistic reinvestments in acquisitions and business plan extensions; 3) further balance sheet flexibility that should lead to some level of share repurchase activity even in ’09.

Site Colocation Fundamentals Remain on a Solid Footing — We remain upbeat on Tower fundamentals as carrier capital spending trends look better than our initial assessment of down 10-15% during 2009, while we believe the pending upgrades to 3G and 4G services should fuel solid colocation revenue growth through 2011.

Balance Sheet Flexibility Over Time — We believe AMT has the capacity to reinvest and/or return 22% of its market cap to shareholders through 2011 at 3x net debt leverage (relative to OIBDA) and roughly 40% if it increases leverage to the mid-point of its target leverage ratio range at 5x.

Company Focus

Buy/High Risk 1HPrice (27 Mar 09) US$32.01Target price US$37.00Expected share price return 15.6%Expected dividend yield 0.0%Expected total return 15.6%Market Cap US$12,711M

Price Performance (RIC: AMT.N, BB: AMT US)


2008A 0.10A 0.12A 0.15A 0.20A 0.54A 0.58A

2009E 0.13E 0.14E 0.15E 0.16E 0.59E 0.62E

Previous 0.13E 0.14E 0.15E 0.16E 0.59E na

2010E na na na na 0.79E 0.81E

Previous na na na na 0.79E na

2011E na na na na 1.01E 1.00E





Verizon Communications Inc (VZ) Updating 1Q/09 Wireless Net Add Forecasts Updating 1Q/09 Net Add Forecasts — We increased our net add forecast

from 800k to 1.1 million, based on our expectation for a greater share donation from Sprint during the quarter and a lower contribution of T-Mobile USA net adds. The pending conversion of Qwest customers to Verizon and acquisition of Alltel may add some upside potential to our revised net add forecast for Verizon, while we maintain our EPS forecasts.

Maintain Buy/ High Risk Rating on VZ — We prefer Buy-rated Verizon (relative to Hold-rated AT&T) with opportunities for Verizon to produce better earnings growth from acquisition-related synergies through Alltel, improving scale from its FiOS platform in the consumer segment, and the potential for incremental cost cutting over time.

Company Focus

Buy/High Risk 1HPrice (27 Mar 09) US$30.62Target price US$35.00Expected share price return 14.3%Expected dividend yield 6.0%Expected total return 20.3%Market Cap US$86,978M

Price Performance (RIC: VZ.N, BB: VZ US)


2008A 0.61A 0.67A 0.66A 0.61A 2.54A 2.54A

2009E 0.58E 0.63E 0.64E 0.62E 2.47E 2.50E

Previous 0.58E 0.63E 0.64E 0.62E 2.47E na

2010E na na na na 2.68E 2.65E


2011E na na na na 2.95E 2.79E





Sprint

Summary of Estimate Changes For Sprint

We have updated our forecasts following the 10K release and for our updated expectations for 1Q results. Our revenue forecast increased for 1Q/09 from $8.23 billion to $8.35 billion, for FY09 from $32.10 billion to $32.80 billion, for FY10 from $30.58 billion to $31.81 billion and for FY11 from $30.37 billion to $31.83 billion. Our OIBDA forecast has increased for 1Q/09 from $1.46 billion to $1.60 billion, for FY09 from $5.95 billion to $6.60 billion, for FY10 from $4.79 billion to $5.78 billion and for FY11 from $4.43 billion to $4.79 billion. Our normalized EPS loss estimates narrowed for 1Q/09 from ($0.13) to ($0.10), for FY09 from ($0.57) to ($0.42), for FY10 from ($0.61) to ($0.40), and for FY11 at ($0.61) to ($0.54).

Figure 3. Summary of Estimate Changes – Consolidated

$ in millions, except per share and subscriber metrics

1Q/09E Variance % Var. Rel. 2009E Variance 2010E Variance 2011E Variance

Line Item New Old H/(L) to Est. New Old H/(L) New Old H/(L) New Old H/(L)

Consolidated Income Statement ($ in Millions)

Wireless Revenue 7,134 7,006 128 1.8% 28,053 27,329 724 27,238 25,970 1,268 27,331 25,820 1,511GMG Revenue 1,495 1,495 0 0.0% 5,830 5,830 0 5,623 5,623 0 5,549 5,549 0Total Revenue 8,353 8,229 124 1.5% 32,799 32,098 701 31,809 30,582 1,227 31,828 30,365 1,463OIBDA 1,597 1,463 134 8.4% 6,599 5,952 647 5,778 4,789 989 4,791 4,435 356OIBDA Margin 19.1% 17.8% 1.3% 7.0% 20.1% 18.5% 1.6% 18.2% 15.7% 2.5% 15.1% 14.6% 0.4%Operating Income (294) (428) 134 (45.6%) (365) (1,012) 647 (287) (1,276) 989 (749) (1,105) 356Net Income (GAAP) (537) (621) 85 (15.8%) (1,815) (2,223) 408 (1,351) (1,977) 627 (1,597) (1,827) 230Adjusted EPS ($0.10) ($0.13) $0.03 ($0.28) ($0.42) ($0.57) $0.14 ($0.40) ($0.61) $0.21 ($0.54) ($0.61) $0.08CFFO 1,332 1,198 134 10.1% 5,565 4,917 648 4,815 3,820 995 3,955 3,590 365Equity FCF (CFFO - Capex) 507 373 134 26.5% 2,265 1,617 648 2,015 1,020 995 655 290 365Balance Sheet ($ in Millions)

Capital Expenditures 825 825 0 0.0% 3,300 3,300 0 2,800 2,800 0 3,300 3,300 0Net Working Investment (1,038) (1,038) 0 0.0% (1,038) (1,038) 0 (1,038) (1,038) 0 (1,038) (1,038) 0Cash 4,226 4,092 134 3.2% 5,384 4,736 648 5,042 3,399 1,643 4,047 2,039 2,008Gross Debt 21,610 21,610 0 0.0% 21,010 21,010 0 18,653 18,653 0 17,003 17,003 0Net Debt 17,384 17,518 (134) (0.8%) 15,626 16,274 (648) 13,611 15,254 (1,643) 12,956 14,964 (2,008)

Source: Company Reports and Citi Investment Research and Analysis

Summary of Changes



Figure 4. Summary of Estimate Changes – Wireless




Subscribers (000s)

Total Gross Adds 2,471 2,141 330 13.4% 10,488 8,648 1,840 11,549 9,285 2,264 13,074 10,471 2,603Total Net Adds (550) (950) 400 (72.7%) (850) (2,500) 1,650 (200) (300) 100 1,050 700 350Ending Subscribers 47,788 47,388 400 0.8% 47,488 45,838 1,650 47,288 45,538 1,750 48,338 46,238 2,100Postpaid Net Adds (1,150) (1,100) (50) 4.3% (3,750) (3,300) (450) (1,500) (1,000) (500) 0 0 0Prepaid Net Adds 500 50 450 90.0% 2,300 200 2,100 1,000 400 600 750 400 350Churn Rate 2.1% 2.2% -0.1% (2.7%) 2.0% 2.0% 0.0% 2.1% 1.7% 0.3% 2.1% 1.8% 0.3%Postpaid Churn 2.2% 2.2% 0.0% 0.0% 1.9% 1.9% 0.0% 1.9% 1.7% 0.2% 1.8% 1.7% 0.1%Prepaid Churn 6.0% 7.0% -1.0% (16.7%) 6.0% 7.4% -1.4% 6.0% 6.0% 0.0% 6.0% 6.0% 0.0%Wholesale Net Adds 100 100 0 0.0% 600 600 0 300 300 0 300 300 0Wholesale Ending Subscriber 8,163 8,163 0 0.0% 8,663 8,663 0 8,963 8,963 0 9,263 9,263 0Affiliate Net Adds 15 15 0 0.0% 60 60 0 54 54 0 49 49 0Affiliate Ending Subscribers 942 942 0 0.0% 987 987 0 1,041 1,041 0 1,090 1,090 0POPs - Consolidated (MM) 288 288 0 0.0% 290 290 0 293 293 0 296 296 0POPs - Covered (MM) 267 267 0 0.0% 269 269 0 272 272 0 275 275 0

Income Statement ($ in Millions)

Service Revenue 6,590 6,495 95 1.4% 25,885 25,339 546 25,147 24,085 1,063 25,111 23,831 1,279ARPU - Postpaid $55.75 $55.00 $0.75 1.3% $55.80 $55.38 $0.42 $55.52 $55.11 $0.42 $55.25 $54.83 $0.42ARPU - Prepaid $31.50 $33.00 ($1.50) (4.8%) $34.19 $32.01 $2.18 $38.42 $37.00 $1.42 $40.03 $37.00 $3.03ARPU - Total (Calc) $45.70 $45.23 $0.47 1.0% $45.28 $45.11 $0.17 $44.22 $43.93 $0.29 $43.77 $43.28 $0.49Total Revenue 7,134 7,006 128 1.8% 28,053 27,329 724 27,238 25,970 1,268 27,331 25,820 1,511OIBDA 1,415 1,281 134 9.5% 5,890 5,243 647 5,071 4,082 989 4,094 3,738 356OIBDA Margin 21.5% 19.7% 1.7% 8.1% 22.8% 20.7% 2.1% 20.2% 16.9% 3.2% 16.3% 15.7% 0.6%

Cash Cost/User (1) $24.75 $25.50 ($0.75) (3.0%) $24.38 $25.13 ($0.75) $23.63 $24.63 ($1.00) $23.53 $24.13 ($0.60)

CPGA (1) $532 $577 ($45) (8.5%) $521 $611 ($90) $501 $592 ($91) $472 $511 ($39)

Operating Income (321) (455) 134 (41.8%) (454) (1,101) 647 (429) (1,418) 989 (906) (1,262) 356


Figure 5. Summary of Estimate Changes – Long Distance




GMG ($ in Millions)

Total Voice 700 700 0 0.0% 2,617 2,617 0 2,303 2,303 0 2,073 2,073 0Total Data 187 187 0 0.0% 671 671 0 537 537 0 483 483 0Total Internet 578 578 0 0.0% 2,434 2,434 0 2,685 2,685 0 2,900 2,900 0Other 30 30 0 0.0% 108 108 0 98 98 0 93 93 0Total Revenue 1,495 1,495 0 0.0% 5,830 5,830 0 5,623 5,623 0 5,549 5,549 0OIBDA 262 262 0 0.0% 1,029 1,029 0 1,027 1,027 0 1,017 1,017 0OIBDA Margin 17.5% 17.5% 0.0% 0.0% 17.6% 17.6% 0.0% 18.3% 18.3% 0.0% 18.3% 18.3% 0.0%Operating Income 117 117 0 0.0% 449 449 0 502 502 0 517 517 0


Summary of Valuation Changes For Sprint

We have raised our target price from $4.00 to $4.50 for Sprint based on our fundamental analysis that takes a simple average of 3 methodologies (DCF, P/FCF, and EV/OIBDA).

On a P/FCF (CFFO-Capex) basis, we apply a 7x multiple (unchanged) to our 2010 fully diluted estimate of $0.68 ex WiMAX ($0.56 estimated for ’09 before) to arrive at a value of almost $5 per share (previously over $4 per share). We estimate free cash flow ex WiMax to decline between 2010E and 2013E and our P/FCF target multiple reflects Sprint's potential to cut capex to offset OIBDA headwinds.



On an EV/OIBDA basis, we value Sprint at 4.5x (4.5x before) our 2010 adjusted OIBDA estimate of $6.08 billion ex WiMax ($6.19 billion previously for ‘09E); this implies an enterprise value of $27.3 billion ($27.9 billion before), plus adjustments of $1.48 billion ($1.48 billion before). We subtract '10E net debt of $13.61 billion (previously $16.27 billion for ‘09E) to arrive at an equity value of over $5 per share (previously around $4 per share). Our EV/OIBDA target multiple is below the historical range of 5.1-6.5x (median 5.5x) over the last 18 months for Sprint Nextel, by our analysis, reflecting our expectations for slower OIBDA growth with an estimated rate of decline between 2010 and 2013.

Finally, our discounted cash flow (DCF) analysis values each of the business segments. We estimate an operating enterprise value of $19.8 billion, previously $19.27 billion. We then subtract net debt of $15.63 billion, $16.27 billion before, and add total adjustments to reconcile the company investments in WiMAX and present value of NOLs of $4.94 billion (including option proceeds), previously $5.51 billion, which generates an equity value of around $3.19 per fully diluted share (previously almost $3 per fully diluted share). Our WACC of 9.4% (9.4% before) is derived using CAPM with a Beta of around 1.2, previously 1.2, a risk-free rate of 3.20% (3.20% before), and an equity premium of 6.44% (6.44% before). The Beta is based on Bloomberg's historical raw calculation for the one-year monthly Beta. Our risk-free rate is based on the three-month average of 10-year bonds. Our equity risk premium is the suggested equity risk premium for US equities recommended by Citi Investment Research, which is based on the average of four methodologies that recognizes the diversity of market opinion and reduces volatility of the outcome over time.

Sprint Nextel

Company description

Sprint Nextel Corporation is a global communications company that offers wireless and wireline products and services to consumers, business and government customers with two principal business divisions that include the wireline division, also referred to as Global Markets Group (GMG), and the wireless division, containing the operations of Sprint and Nextel (following the 4Q/08 completion of the merger of its WiMAX assets into Clearwire). The company is one of the top three wireless providers in the United States, offering service in all 50 states, Puerto Rice and the U.S. Virgin Islands with about 54 million wireless customers at the end of 2007. On August 12, 2005, Sprint and Nextel merged operations, forming Sprint Nextel Corporation. Sprint also spun-off its local communications business on May 17, 2006, as Embarq Corporation (EQ).

Investment strategy

We rate Sprint Hold/Speculative (2S). Our Hold rating on Sprint is based on the following reasoning: 1) we believe the pace of its marketing restructuring will be diluted by slowing industry growth and a tougher competitive climate, 2) we are concerned that its new ad campaign will not materially improve sales productivity as Sprint continues to focus more on product functionality versus voice quality and price, and 3) we are also concerned about lack of visibility around restructuring plans, and 4) we believe higher marketing costs will overshadow Sprint's 2009 OIBDA. We believe potentially positive catalysts depend on additional corporate restructuring and for the company to improve the sales productivity of its CDMA assets, focusing on higher-return postpaid customers.



Valuation

Our $4.50 target price for Sprint Nextel is based on our fundamental analysis that takes a simple average of 3 methodologies (DCF, P/FCF, and EV/OIBDA).

On a P/FCF (CFFO-Capex) basis, we apply a 7x multiple to our 2010 fully diluted est. of $0.68 to arrive at a value of ~$5 per share. We estimate free cash flow ex WiMax to decline between 2010E and 2013E. Our P/FCF target multiple reflects Sprint's potential to cut capex to offset OIBDA headwinds.

On an EV/OIBDA basis, we value Sprint at 4.5x our 2010 adjusted OIBDA estimate of $6.1 billion ex WiMax; this implies an enterprise value of $27.3 billion, plus adjustments of ~$1.5 billion. We subtract '10E net debt of $13.6 billion to arrive at an equity value of over $5 per share. Our EV/OIBDA target multiple is below the historical range of 5.1-6.5x (median 5.5x) over the last 18 months for Sprint Nextel, by our analysis, on slower OIBDA growth with a decline in forecasted OIBDA between 2010 and 2013.

Our DCF analysis that values each of the business segments, we estimate an operating enterprise value of $19.9 billion. We then subtract net debt of $15.6 billion and add total adjustments to reconcile the company investments in WiMAX and present value of NOLs of $4.9 billion (including option proceeds), which generates an equity value of over $3 per fully diluted share.

Our DCF incorporates WACC of 9.4% on a beta of 1.2, a risk-free rate of 3.2%, an equity risk premium of 6.4%, a debt-to-total capital ratio of 50%, and a long-term cash flow growth assumption of 2%.

Risks

We rate Sprint Nextel Speculative, to reflect the increased volatility of earnings as well as low visibility of restructuring plans to improve marketing strategy. Our risk rating also takes into earnings & revenue growth, financial leverage, beta, return on equity, market cap & other qualitative factors. We believe Sprint faces risks to its share price from slowing industry growth, losing share in the iDEN segment, & losing share in its LD/Enterprise segment. Sprint is also increasing near-term capital intensity to pursue its WiMAX network strategy, while facing margin pressure from higher customer acquisition & retention costs for its wireless business.

Completed Merger and spin-off related risks include: Sprint may also be subject to the risks of Nextel's stand-alone operations; the merger may create risks from the inability to achieve the magnitude or timing of synergies; Sprint could face incremental costs associated with the merger, including the resolution surrounding the affiliate relationships with Sprint; Sprint Nextel & Embarq may face limitations to preserve the tax-free nature of the separation on both a strategic front, with respect to use of their equity, & a financial front, with respect to the timing & amount of shares that could be repurchased. Conversely, if Sprint is able to realize its operating synergies more quickly & attract more subscribers from its new marketing campaign or alternatively be bought at a premium to our fundamentally-weighted valuation analysis, the stock could outperform our target. If the impact from these risks proves to be greater than we anticipate, the shares may have difficulty reaching our target valuation.



American Tower Corp

Company description

American Tower's (AMT) primary business is leasing antenna space on multi-tenant towers to wireless service providers and radio and television broadcast companies. The company operates in two segments: rental and management segment and network development services segment. The rental and management segment provides leasing and subleasing of antenna sites on multi-tenant towers and other properties primarily for customers in the wireless communication and broadcast industries. The network development services segment offers antenna and line installation, maintenance, construction, site acquisition, zoning, radio frequency engineering, network design, tower monitoring, steel fabrication and other services. AMT announced the sale of its tower construction service unit on 10/19/04.

Investment strategy

We rate American Tower Buy/High Risk (1H). We recently met with American Tower’s Chairman and CEO, Jim Taiclet. We recommend buying shares of AMT as we believe the company has solid revenue visibility heading into ’09, and retains a strong liquidity position to reinvest and opportunistically acquire assets and/or its own shares, We continue to like the fundamental backdrop for site colocation from the wireless sector, and we believe American Tower is well positioned to capture growth opportunities within the industry.

Valuation

Our 12-month target price of $37 for American Tower uses roughly equal weights of the following methodologies: Our DCF assumes revenues scale from $1.67 billion in 2009 to $2.47 billion by 2015, and OIBDA margins expanding to ~76%. We derive a WACC of 8.6% using a target debt-to-total capital ratio of 40%, cost of equity of 10.9%, and beta of 1.20 to arrive at an operating enterprise value of $18.4 billion, which is adjusted to get a total firm value of $19.1 billion. Then we subtract year-end ‘09 net debt of $3.5 billion to derive an equity value of $15.7 billion or around $39 per fully diluted share. Our terminal FCF multiples assume a FCF growth rate of 3% and a terminal free cash flow multiple of about 17.9x. We apply a 20x P/FCF multiple on our 2009 free cash flow estimate of $1.69 per share. We apply a 20x P/FCF multiple for American Tower, which is within the range of the 15-25x 2009 multiple range we place on tower stocks due to the company's projected CAGR of around 22% between 2009-2012 compared to an average of under 20% for the tower group, yielding a fair value of $34 per share. We apply a 16x EV/OIBDA multiple on our 2009 OIBDA estimate of $1.16 billion. We believe tower stocks in our coverage universe should trade at ~13-20x our '09 OIBDA given the range of growth prospects. We expect an OIBDA CAGR of around 10% between 2009-2012, which should be modestly above the tower group average of roughly 9%, yielding a fair value of approximately $39 per share.



Risks

We rate American Tower High Risk, with operating risk including: high leverage, significant exposure to spending by wireless operators; and above-average share price volatility. However, we believe the company's recurring revenue model with significant operating leverage and high incremental margins create a less volatile business model with relatively high predictability. Tower industry risks include: revenue and profitability is subject to the capital and maintenance budgets of wireless telecom carriers and broadcast providers. Investment risks include: Wireless consolidation within the United States remains a key risk for all tower companies over the long term, as American Tower relies on a small number of customers for a significant portion of its revenues; high financial leverage creates sensitivity to any rapid rise in interest rates; and, uncertainty related to the investigation into the company's historical practices of granting stock options that could lead to financial restatements and potentially higher expenses from pending litigation and complying with the pending inquiries. If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty reaching our target price.

Verizon Communications Inc

Company description

Verizon Communications Inc. (VZ) is the second largest telecommunications carrier within the U.S., operating in states such as New York, Pennsylvania, New Jersey, California, Virginia, and Massachusetts. The company had around $93 billion in revenue, 41 million local lines, and 65 million wireless subscribers at the end of 2007, providing the full bundle of services, including local voice, long distance, and data to residential and business customers. It is also the largest cellular phone provider in the U.S. through its 56%-owned joint venture with Vodafone.

Investment strategy

We rate the shares of Verizon Communications Inc. Buy/High Risk (1H). Our Buy recommendation on Verizon is based on the following points: 1) opportunities to reduce its wireline cost structure; 2) generate solid wireless growth in a slowing industry environment with potential benefits from its pending Alltel acquisition; 3) improving scale in its FiOS segment; and 4) generate solid earnings growth in ’10.

Valuation

Our $35 target price for Verizon Communications Inc. is based on the average of the following methodologies:



Our DCF analysis uses an average weighted average cost of capital (WACC) of 8% (based on a beta of 1.07x, a risk-free rate of 3.2%, and a market risk premium of 6.44%) and a consolidated terminal growth rate of 1.7% to arrive at a firm value estimate of almost $159 billion at year-end 2009. This is adjusted for net debt and other adjustments for investments and minority interests to arrive at an equity value of over $107 billion or over $35 per fully diluted share at year-end 2009.

We assume a 6.0x FV/OIBDA multiple on our proportionate 2010 OIBDA estimate of $26.13 billion. We believe the diversified telcos in our coverage universe should trade at 4x-7x our '09 OIBDA given similar growth prospects. We expect an OIBDA CAGR of 4.7% between 2010-2013, yielding a fair value of over $34 per share.

We use a P/E multiple of 13x our 2010 EPS estimate of $2.68 to arrive at a value for the core business of around $35. The 13x multiple is within the historical trading range of 9x-16x over the last three and a half years, with an average and median of about 14x, by our analysis. We believe this multiple properly reflects an earnings growth of around 9.4% between 2010 and 2013.

Risks

We rate Verizon Communications Inc. High Risk, which reflects the elevated level of industry risk that may sustain greater share price volatility in the medium-term, despite its healthy balance sheet, strong FCF, and large-cap market capitalization. Our forecasts include the pending acquisition of Alltel on 12/31/08; the need for regulatory approvals and potential for divestitures could affect our forecasts. Risks to our call that could lead the share price to fall further below our target price, rather than rise, include the potential for the stock to trade on earnings or free cash flow instead of OIBDA during a period of higher capital spending on investments in its fiber-to-the-home strategy. The stock could be under pressure if fiber-related dilution is higher than initial management guidance and our expectations; pension dilution is higher than expected; the pending Alltel merger is not completed or does not meet our expectations for revenue and cash flow contributions; core wireline margin pressure could further dilute earnings; the market could change its focus to the premium P/E and P/FCF multiples at which Verizon is currently trading; the potential to buy a minority stake in Verizon Wireless from Vodafone may be dilutive and substantially increase financial leverage, and potential MCI synergies may fall short of our expectations. Also, the pending spin-off of access lines may dilute earnings, while financing costs associated with its pending acquisitions of spectrum and Rural Cellular could be higher than our forecasts. We recognize the risk to Verizon's dividend to the extent that economic, competitive, or regulatory pressures weigh more heavily on cash flow relative to our expectations, which could also negatively impact the share price.



Appendix A-1 Analyst Certification

Each research analyst(s) principally responsible for the preparation and content of all or any identified portion of this research report hereby certifies that, with respect to each issuer or security or any identified portion of the report with respect to an issuer or security that the research analyst covers in this research report, all of the views expressed in this research report accurately reflect their personal views about those issuer(s) or securities. Each research analyst(s) also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that research analyst in this research report.

IMPORTANT DISCLOSURES

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Date Rating Target Price Closing Price1 26-Apr-06 *2H *28.00 24.662 18-May-06 2H *26.00 22.733 3-Aug-06 2H *20.00 17.544 9-Jan-07 2H *19.00 17.855 28-Feb-07 *1H *25.00 19.95

Date Rating Target Price Closing Price6 27-Jun-07 *2H 25.00 21.137 18-Sep-07 2H *21.00 18.108 1-Nov-07 2H *19.00 17.159 18-Jan-08 *2S *11.00 8.70

10 28-Feb-08 2S *10.00 7.11

Date Rating Target Price Closing Price11 17-Apr-08 2S *8.00 6.6712 5-May-08 2S *9.00 9.1913 8-May-08 2S *10.00 9.3814 7-Nov-08 2S *4.50 3.3715 19-Feb-09 2S *4.00 3.22

Date Rating Target Price Closing Price1 26-Apr-06 *2H *28.00 24.662 18-May-06 2H *26.00 22.733 3-Aug-06 2H *20.00 17.544 9-Jan-07 2H *19.00 17.855 28-Feb-07 *1H *25.00 19.95

Date Rating Target Price Closing Price6 27-Jun-07 *2H 25.00 21.137 18-Sep-07 2H *21.00 18.108 1-Nov-07 2H *19.00 17.159 18-Jan-08 *2S *11.00 8.70

10 28-Feb-08 2S *10.00 7.11

Date Rating Target Price Closing Price11 17-Apr-08 2S *8.00 6.6712 5-May-08 2S *9.00 9.1913 8-May-08 2S *10.00 9.3814 7-Nov-08 2S *4.50 3.3715 19-Feb-09 2S *4.00 3.22

Sprint Nextel (S)Ratings and Target Price HistoryFundamental ResearchAnalyst: Michael Rollins, CFA

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Date Rating Target Price Closing Price1 27-Apr-06 1H *42.00 34.142 20-Oct-06 1H *47.00 37.45

Date Rating Target Price Closing Price3 20-Feb-07 1H *49.00 40.604 16-Apr-07 1H *51.00 39.76

Date Rating Target Price Closing Price5 3-Nov-08 1H *41.00 32.426 26-Feb-09 1H *37.00 29.12

Date Rating Target Price Closing Price1 27-Apr-06 1H *42.00 34.142 20-Oct-06 1H *47.00 37.45

Date Rating Target Price Closing Price3 20-Feb-07 1H *49.00 40.604 16-Apr-07 1H *51.00 39.76

Date Rating Target Price Closing Price5 3-Nov-08 1H *41.00 32.426 26-Feb-09 1H *37.00 29.12

American Tower Corp (AMT)Ratings and Target Price HistoryFundamental ResearchAnalyst: Michael Rollins, CFA

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Date Rating Target Price Closing Price1 9-Oct-06 *3M *28.70 33.832 21-Nov-06 3M *29.00 34.753 30-Apr-07 3M *33.00 38.514 17-May-07 *1M *48.00 42.59

Date Rating Target Price Closing Price5 30-Jul-07 1M *49.00 42.626 28-Jan-08 1M *45.00 38.717 5-Feb-08 1M *44.00 36.708 29-Jun-08 *1H *42.00 34.28

Date Rating Target Price Closing Price9 13-Oct-08 1H *33.00 28.95

10 31-Dec-08 1H *38.00 33.9011 28-Jan-09 1H *35.00 30.23

Date Rating Target Price Closing Price1 9-Oct-06 *3M *28.70 33.832 21-Nov-06 3M *29.00 34.753 30-Apr-07 3M *33.00 38.514 17-May-07 *1M *48.00 42.59

Date Rating Target Price Closing Price5 30-Jul-07 1M *49.00 42.626 28-Jan-08 1M *45.00 38.717 5-Feb-08 1M *44.00 36.708 29-Jun-08 *1H *42.00 34.28

Date Rating Target Price Closing Price9 13-Oct-08 1H *33.00 28.95

10 31-Dec-08 1H *38.00 33.9011 28-Jan-09 1H *35.00 30.23

Verizon Communications Inc (VZ)Ratings and Target Price HistoryFundamental ResearchAnalyst: Michael Rollins, CFA

USD


CoveredNot covered Chart current as of 28 March 2009

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Teleconomy 2009 Wireless Update

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