U.S. Cellular Upgraded

We are upgrading our recommendation on U.S. Cellular (USM) to Neutral from Underperform. Although the largest wireless Chicago-based carrier missed the Zacks Consensus Estimate in the recently concluded third quarter, the increased penetration of smartphones led to earnings growth from the year-ago level. Currently, the stock has a Zacks #3 Rank (Hold).

The company’s third quarter earnings missed the Zacks Consensus Estimate by a penny and reported a 7% year-over-year increase. On the other hand, revenues dipped 0.3% year over year. Growth in data revenue (31%) was fully offset by lower voice revenues and inbound roaming revenues resulting from Verizon Communication’s (VZ) acquisition of Alltel. U.S. Cellular registered a net loss of 41,000 customers during the third quarter.

At the end of the third quarter, U.S. Cellular’s cash balance reduced to $269.3 million from $404.9 million in the year-ago quarter. The company currently has approximately $867.8 million in long-term debt.

Going forward, U.S. Cellular will further expand its smartphone portfolio with premium handset offerings, which includes Android-based phones. These smartphones are expected to drive data revenues through increased adoption of smartphones. The company is evaluating the deployment of Long-Term Evolution (LTE), a fourth-generation wireless technology, and plans to launch LTE network in 2012, with trials in one market in late 2011.

U.S. Cellular recently launched “The Belief Project,” which focuses on price plans and handsets as well as provides a compelling high-value portfolio of products and services. This project is expected to enhance revenue growth by attracting new customers and reducing churn. It will also have a positive impact on long-term profitability, increase at least 10% of post-paid gross additions over the next several years and contribute higher growth in average revenue per customer.

On the flip side, U.S. Cellular remains challenged by an increasingly competitive domestic wireless market and intense pricing pressure, which is adversely affecting its customer accretion. We believe the company’s high-margin roaming revenues remain under pressure and weigh on results.

In addition, U.S. Cellular remains challenged by the lower cost service plans offered by some of its competitors such as Sprint Nextel Corp. (S), Leap Wireless International Inc. (LEAP) and MetroPCS Communications Inc. (PCS).

US CELLULAR (USM): Free Stock Analysis Report

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