MetroPCS Turnaround More Visible After Earnings Beat

| About: T-Mobile US, (TMUS)

MetroPCS Communications (PCS), a wireless telecom company, announced its quarterly results on July 26. Since the announcement, the stock has appreciated almost 37%, closing at $8.59 on Thursday. PCS posted EPS of 41 cents, beating consensus estimates of $0.21 by a comfortable margin. Total revenues showed an improvement of 6% compared to the second quarter of the prior year, also beating consensus estimates of $1.26 billion, albeit by a small margin.

The second quarter ended with a very healthy earnings surprise of 95%. Net income for the company rose almost 77% compared to the same quarter of the previous year. The latest quarterly results were largely helped by service revenues, which grew by 4% from Q2 2012. Below is an overview of the key metrics for the company's business, which showed an overall improvement from the previous year's quarter.

Q2 2012

Q2 2011

Average revenue per user



Churn rate



Total subscribers

9.29 million

9.08 million

The company has been increasing its revenues over the last few years. The same can be said about its bottom line, which has increased by over 30% since FY 2009. The company's popular "wireless for all" service continues to be the growth driver and is largely responsible for the recent rise in its average revenues per user. The recent launch of its talk and text plan is going strong and, according to the company, it has done well in the recent quarter. The company concentrated more on marketing its service plans in the second quarter, which have historically yielded higher margins. PCS announced that it is set to finish its 4G LTE rollout in the third quarter. PCS had almost 8% of its total customers on 4G services by Q2 2012, which is likely to go even higher as cheaper handsets are made available in the current quarter.

In a previous article on PCS, we discussed the company's business model and the key growth drivers. Despite the significant deterioration in the company's first-quarter results, we suggested a bright outlook for the company. A consistent rise in revenues, net income, average revenue per user, and a declining churn indicate that the company has strength in its operations. The stock is trading at 10 times its earnings, at a discount to both its industry and Verizon (NYSE:VZ) (at 16 times) and AT&T (NYSE:T) (at 14 times). Other multiples, like P/S (0.62 times) and P/B (1 times), are also at a discount to the company's peers. We believe there is a contradiction between the company's poor stock performance and its fundamentals, and suggest that the stock has reasonable price appreciation potential. The most recent upgrade has come from Deutsche Bank, going from "hold" to "buy."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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