MetroPCS: A Short for 2009 8 comments
an article to
-
Font Size:
-
Print
- TweetThis
Shareholders of MetroPCS Communications, Inc. (PCS) were greeted with a sharp increase in the share price in the latter half of November. The stock rallied largely as investors endorsed the company’s low cost business model. PCS offers customers the ability to have unlimited cell phone minutes for a low price (usually $35 to $45 per month). In addition, customers do not have to sign a long-term contract or have their credit checked.
In an environment that has been difficult for consumers, this model appears to be gaining traction. Currently the major carriers charge an average of more than $100 per month for similar unlimited calling plans. But one big difference is the network coverage. Sprint (S), AT&T (T), Verizon (VZ) and T-Mobile all have networks that span the entire US (and many areas abroad). While PCS has signed a mutual agreement with Leap Wireless International (LEAP) to offer roaming services for each company’s customers, the coverage is still limited.
PCS is working to expand that network by concentrating on large metropolitan cities where it can get the most efficient growth out of capital expenditures. In 2008, the company was able to launch service in its first Northeast city - Philadelphia. Management expects to roll out New York City and Boston sometime during 2009. While the company will likely spend $700 to 900 million in capital expenditures, management expects to add 1.4 to 1.7 million new customers. 2009 should also mark a transition for the company as it begins to operate at cash-flow positive levels.
Looking at the company’s balance sheet, it ended the third quarter with cash of roughly $1.02 billion. This appears relatively healthy, but keep in mind that the company will spend the majority of this as it pursues expansion plans. At the same time, PCS is carrying a hefty debt load of roughly $3 billion. This financial leverage increases risk for shareholders. If cash-flow does not come in as expected, the company could be forced to raise capital (adding to debt or diluting shareholders), or to cut back on expansion plans. Although the balance sheet shows total shareholders equity of $2.02 billion, assets include FCC licenses which are valued at $2.4 billion. It is difficult to determine whether these licenses would carry the same value if they were sold on the open market.
Ironically, success by MetroPCS could become its greatest liability. As the business model begins to show success and gain market share, the larger wireless companies will certainly step up the competition. Currently the higher cost national firms are able to maintain pricing power because customers are willing to pay. But if the business begins to shift towards low priced offerings, you can expect to see Spring, AT&T, Verizon and T-Mobile all cut their rates. Since a national network is superior to coverage in a certain number of cities, the big firms will still have a competitive advantage.
MetroPCS is currently trading at 31 times 2008 expected earnings and more than 20 times 2009 expectations. While bulls argue that the growth justifies the high price, I would submit that this growth is in jeopardy due not only to a difficult economy, but also due to the potential for strong competition. So at this point, the recent run-up in price seems to give those willing to short the stock an attractive entry. If you are currently holding the stock, I would think carefully about lightening your exposure at this point. Despite the strong start to the market the first day of trading, risk is still significant and could negatively effect this stock.
Disclosure: Author does not have a position in PCS.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
1. Unit economics - this is the main reason why MetroPCS has a competitive advantage at the low-cost end of the spectrum. By focusing on low mobility, lower-end customers in major metro areas, MetroPCS can be much more efficient with its capital expenditures, spectrum acquisitions, marketing dollars, etc. Maintaining a nationwide network PREVENTS Verizon, AT&T, etc. from being able to be cost competitive at Metro's levels. This allows PCS to offer its wireless service at a much lower price point and maintain profitability.
2. FCC auction prices are fairly standardized and there are numerous comps to look at. $2.4 billion is a good estimate of fair value.
3. Growth in core markets where there is little investment capex is highly accretive to cash flows. As Metro's markets gain maturity (like 2009 will show), subscriber growth translates into a large amount of free cash flow.
4. If your thesis is based partly on a difficult economy, PCS is just about the worst short among US wireless carriers. They compete well on cost, which is of ultimate importance to an injured consumer. Switching costs have also been substantially reduced by the use of Houdini software.
Dan, I have looked at LEAP and published an article about the company recently for Taipan Publishing Group - the article is in the Death Cross Trader publication. I can't really disclose much more on Seeking Alpha right now but I think you are on to something...
Joe - you make some good points.
I do think that Verizon, Sprint etc will be able to lower prices if they feel it is necessary to compete with PCS. You are right that their capital spending budgets are huge. But they are able to leverage those costs over a much larger subscriber base. Also, they may be willing to take a loss in certain markets to prevent PCS from taking too much market share.
the FCC spectrum may be a valid comp - I'm no expert in that area. But the spectrum is at best an illiquid asset. The concern remains that if cash flows are not up to expectations, PCS could face the tough decision of curtailing some spending, or raising capital in an illiquid market.
Competing on low cost certainly works currently. But I think competition will encroach on that advantage over the coming months.
Time will tell - I don't have a crystal ball. But the risk seems substantial at this price point. Thanks guys,
Zach
zachstocks.com
On 11/05/08 MteroPCS reported that “recently surpassed five million subscribers”.
That is over 152,686 Net Additions for one month alone (November)
Wait till tomorrow to hear the total Net Additions for Q4. If it is over 400,000 as I predict, you will/may re-evaluate your shorts for 2009
The wireless market faces a serious shakeup in 2009, a major network operator outsources its network, and non-telecom players pose a bigger threat to the telecom industry in 2009, according to inCode, a business strategy and technology consulting firm that claims an 80% accuracy rating of past predictions.
In wireless, the rich will get richer, but the low-cost guys at the bottom -- including Leap Wireless, US Cellular and MetroPCS – will also thrive by focusing on specific segments, said Rob Prudhomme, vice president of Practice Development for inCode. It’s the service providers and equipment vendors stuck in the middle that face a scary future, and that group includes Sprint, T-Mobile, Motorola, Alcatel-Lucent and Nortel Networks, Prudhomme said. Nokia and Ericsson lead the wireless industry with more than 60% market share, and Huawei and ZTE Technologies compete effectively on price at the bottom, he said. inCode’s prediction is that both vendor and service provider ranks shrink to three major operators and three major infrastructure providers.
Other predictions:
2. Cord-cutters will move at faster rates to low-cost wireless providers such as Leap and Metro, Prudhomme said. “As people look at their household budgets, those that have to choose between wireless and fixed-line services are going to move to unlimited-plan carriers,” he said. “Companies like Leap and Metro PCS, which focus on wireline replacement at the low end of the market, [will] see their fortunes improve dramatically.” The movement to wireless data and away from wireline broadband won’t be as fast.
more here telephonyonline.com/wi...
MetroPCS just released that Net Additions of new customers for Q4 was 520,000 WOW WOW WOW
is MetroPCS a short for 2009? i do not think so.
target $22.00 and higher soon. (that is after Boston and New York lunch.)
“We are very pleased to report fourth quarter net additions of 520 thousand, the highest quarterly net additions in company history. During the fourth quarter and for the full year 2008, our strong subscriber growth continues to prove the resiliency of the MetroPCS business model in the midst of the current unprecedented economic environment. As voice continues to go wireless, our innovative unlimited service offerings are uniquely tailored to provide subscribers with a predictable, affordable and flexible wireless solution that meets their needs,” said Roger D. Linquist, MetroPCS’ Chairman, President and Chief Executive Officer.
“This year, for the sixth consecutive year, we have grown our subscriber base by 35% or higher. We are excited about our future growth potential given current landline replacement trends, the resiliency of our business model, as well as the incremental growth we expect from our planned service launches including Boston and New York in early 2009.”
Press Release:
biz.yahoo.com/bw/09010...
----------------------...
On Jan 05 08:27 AM User 331175 wrote:
> On 10/30/08 Total Subscribers at the end of 3Q = 4,847,314
>
> On 11/05/08 MteroPCS reported that “recently surpassed five million
> subscribers”.
> That is over 152,686 Net Additions for one month alone
>
>
> Wait till tomorrow to hear the total Net Additions for Q4. If it
> is over 400,000 as I predict, you will/may re-evaluate your shorts
> for 2009
MetroPCS just released that Net Additions of new customers for Q4 was 520,000 WOW WOW WOW
is MetroPCS a short for 2009? i do not think so.
target $22.00 and higher soon. (that is after Boston and New York lunch.)
“We are very pleased to report fourth quarter net additions of 520 thousand, the highest quarterly net additions in company history. During the fourth quarter and for the full year 2008, our strong subscriber growth continues to prove the resiliency of the MetroPCS business model in the midst of the current unprecedented economic environment. As voice continues to go wireless, our innovative unlimited service offerings are uniquely tailored to provide subscribers with a predictable, affordable and flexible wireless solution that meets their needs,” said Roger D. Linquist, MetroPCS’ Chairman, President and Chief Executive Officer.
“This year, for the sixth consecutive year, we have grown our subscriber base by 35% or higher. We are excited about our future growth potential given current landline replacement trends, the resiliency of our business model, as well as the incremental growth we expect from our planned service launches including Boston and New York in early 2009.”
Press Release:
biz.yahoo.com/bw/09010...
----------------------...
On Jan 05 08:27 AM User 331175 wrote:
> On 10/30/08 Total Subscribers at the end of 3Q = 4,847,314
>
> On 11/05/08 MteroPCS reported that “recently surpassed five million
> subscribers”.
> That is over 152,686 Net Additions for one month alone
>
>
> Wait till tomorrow to hear the total Net Additions for Q4. If it
> is over 400,000 as I predict, you will/may re-evaluate your shorts
> for 2009