PCS: Buckling Under the Weight of Sprint, Verizon

| About: T-Mobile US, (TMUS)

The cut-rate prepaid cellular market, though representing fully a third of the growth in wireless in the U.S., is not always a comfortable place to be, as evinced by the results today from Metro PCS (PCS), the discount pre-paid cellular operator whose stock was cut by a third after disappointing Q2 earnings.

In a note to clients, Thomas Weisel analyst James Breen cut his rating on the stock to “Market Weight” from “Overweight” and cut his price target to $10 from $21. Ouch.

Breen says he thought Metro PCS could distinguish itself in the pre-paid market with more up-to-date handsets and more prolific distribution channels. However, after a 5.8% churn rate in the quarter, 14% higher than he expected, it’s clear others are taking share from Metro, he writes.

Who? Sprint’s (NYSE:S) Boost Mobile, for one, which added 993,000 subscribers in the second quarter, compared to Metro PCS’s 206,000 net additions, America Movil’s (NYSE:AMX) Tracfone unit, in conjunction with Verizon Communications (NYSE:VZ), and Leap Wireless (LEAP).

Breen’s numbers are going down for this year, to $3.44 billion in revenue, $891.8 million in adjusted Ebitda, and 32 cents per share profit. That’s compared to a prior estimate of $3.67 billin, $962 million, and $.47. You’ll note Breen doesn’t even give the company the benefit of its reiterated forecast for $900 million to $1.1 billion in adjusted Ebitda.

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