U.S. Cellular Remains Neutral - Analyst Blog

Despite the economic slowdown, U.S. Cellular's ( USM ) third quarter earnings surpassed the Zacks Consensus Estimate and shot up from the year-ago level primarily on smartphone sales. We believe the company will register further growth in smartphone sales as it continues to launch new handsets. Additionally, increased market penetration of the Belief plan is driving lower churn rates and subscriber addition. The expansion of 3G networks and the expected launch of Long-Term Evolution (LTE) technology also bode well for growth.

The company remains optimistic on the growing demand for its smartphones. In third quarter 2011, smartphone sales represented approximately 40% of equipment sales and are expected to remain crucial to revenue growth. U.S. Cellular continues to expand its smartphone and Tablet arena and plans to launch two tablets and eight smartphones including the company's first 4G-enabled smartphone with Android 2.3 operating system throughthe first quarter of 2012.

In order to offer competitive services to customers, the company continues to invest in new cell site construction, increasing capacity in existing cell sites and switches, upgrading technology, developing new and enhancing existing office systems, as well as constructing new and remodeling existing retail stores. To support capital intensive network development, U.S. Cellular has maintained its capital expenditure projection of approximately $750-$800 million for 2011.

However, U.S. Cellular operates in an intensely competitive wireless market and remains significantly challenged by lower-cost mobile service plans from competitors. On a regional level, the company competes head-to-head with Leap Wireless ( LEAP ) and MetroPCS ( PCS ). As a result, pricing strategies have become highly competitive and any rise in prices may result in a considearble slowdown in subscriber growth. As the U.S. wireless market reaches maturity, pricing strategies will be the salient customer retention element.

While U.S. Cellular has effectively evolved its wireless network from the earlier CDMA technology to faster versions, such as EV-DO, the aggressive network rollout plan may strain finances. Moreover, high costs associated with customer acquisition and retention are expected to weigh on its margins.

Further, U.S. Cellular is expected to be adversely affected by the recent amendments in Universal Service Fund (USF) brought in by FCC.U.S. Cellular currently draws approximately $160 million per year from USF that represents a significant revenue contribution. Therefore, the end to this program would certainly remain detrimental to the company's revenues over the coming years. The new regulation would also imply reductions in inter-carrier compensations like switch access charges, ultimately eliminating it by 2018.

These rules are likely to impact the availability of broadband solutions throughout the nation as local carriers struggle to secure the necessary financial strength to survive in a competitive market. Carriers in rural areas are equipped to supply broadband solutions to customers but would struggle to profit when fees and federal benefits are capped.

Consequently, we have a long-term Neutral recommendation on U.S. Cellular supported by Zacks #3 (Hold) Rank.

LEAP WIRELESS ( LEAP ): Free Stock Analysis Report

METROPCS COMMUN ( PCS ): Free Stock Analysis Report

US CELLULAR ( USM ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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