By Zackary D. Barron
The wireless sector continues to exhibit strong growth and earnings results as new technologies associated with the cellular phone continue to permeate into the American way of life. As is expected, companies like Apple Computer (AAPL) that have leveraged themselves into this sector are enjoying plush valuations as a result.
One of the companies that is entering this sector as a consumer value is Texas-based Metro PCS (PCS), a cell-phone service provider offering a $40 per month service plan that puts it amongst the least expensive plans in the business. The company also offers prepaid plans and unlimited usage plans so it also competes with the more standard fare of the cell phone service providers.
With a market capitalization of $4.6 billion and earnings in the prior four quarters of around $214 million, the company is trading at a trailing PE of around 21.6. This is a substantial PE premium to competitors like AT&T (T) (much larger business, much slower growth) and Nokia (NOK) (similar circumstances to AT&T). So what justifies this PE premium and do Metro PCS’ future prospects justify that premium or perhaps an even higher one?
On January 6, analyst Jennifer Fritzsche of Wells Fargo (WFC) said that Metro PCS subscriber growth of 298,000 subscribers for the quarter was below her expectations for 450,000 new subscribers. Nonetheless, in the prior quarter according to the company’s 10-Q they had subscriber growth of 223,000 for the three months ended September 30,2010 or 75,000 less than this most current quarter. So the company is still showing strong subscriber growth of nearly 900,000 new subscribers each year in what is a difficult economic climate.
The company is also releasing a plan for the Android (GOOG) phone which should give it a very price-competitive plan in the market for the more advanced smart phones.
Metro PCS has earned an unqualified opinion from its auditors, Deloitte and Touche, for the past three years so accounting improporieties are less of a concern.
The company has net book value of around $2.5 billion. From a valuation perspective the question is whether or not the present value of future earnings for this company are greater than the $2.1 billion priced into it at this time?
Metro PCS has a below average beta of around 0.7 largely due to the lack of volatility in its underlying business; if you look at its quarterly revenue results for the past 3 years they are almost a straight and steady upward slope.
Consensus earnings growth estimates are greater than 10% per annum for the next four years. Combined with a steadily improving economy, a reasonably strong balance sheet (total liabilities-to-equity of 2.32x), and its current valuation, that is a bet I am willing to take. My valuation puts this company at about $19.00 per share.
Disclosure: No position