Metro PCS Communications: The Bull Case

| About: T-Mobile US, (TMUS)

Tired of unpleasant surprises when opening cell phone bills? Metro PCS (PCS) has the solution. The company offers only pre-paid unlimited calling and data plans so the monthly check is the same every time. PCS also benefits from the non-traditional format because all revenues are pre-paid and the company does not have to worry about allowing for bad debt or wondering if customers will pay for service they have already used.

The pre-paid service has another distinct advantage for the company because it can offer services to anyone without having to run a credit check or verify the customer's ability to maintain a contract. Bear Stearns has noted that the company's exposure to illegal immigrants is larger than most carriers because it doesn't have to do background checks on clients. This is also a factor of the company operating in markets where immigration is more prevalent.

Currently, PCS's footprint covers 7 of the top 25 US markets. Typically the company rolls out one city at a time keeping costs in check and allowing them to concentrate on bringing the new market up to speed quickly. The next few years should bring many notable cities online including NYC, Boston, Philadelphia, and Las Vegas. The rollout should allow the company to continue its trend of strong revenue growth that spans many quarters. Baird believes the company's IPO in April raised enough capital ($862.5m) to fund this growth without additional capital infusions. Thomas Weisel believes they may need to raise a bit more capital but is still bullish on the name.

At this point, the average Cost Per Gross Addition (CPGA or cost of adding a new subscriber) is lower than any competitor at roughly $100 and the operating costs per subscriber also remain below the industry norm. This allows the company to realize great profitability even though their churn rate (percentage of customers dropping their service) is significantly above the industry average. Keeping costs in line will be key as the company continues to roll out service in increasingly competitive markets.

Analysts site some concerns revolving around spectrum that the company will use in its expansion. The FCC auctioned off this spectrum but there could be some timing issues as to when PCS will be able to take advantage of this asset it purchased. New hardware will have to be installed and some current users of the spectrum will have to be removed. Any delay could be negative for the company so this will need to be monitored.

All in all, the future looks rosy for the company and with the stock only being available for the last 2-3 months, there is likely pent up demand for the company. Much of the stock was issued to private equity holders who agreed to a 180 day lockup. This may cause some overhang in supply of the stock but if the market is healthy and the company continues to execute, this will only have a muted effect on the shares.

Disclosure: I have a long position and will likely add more in the future.