Buy MetroPCS: A Value Stock That Offers Growth

| About: T-Mobile US, (TMUS)
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MetroPCS Communications, Inc., (PCS), a pay as you go telecom operator, had an impressive second quarter despite posting a net subscriber loss. The company posted earnings that grew by over 75% in the quarter. Reported EPS was 41 cents, while analysts were expecting EPS of 21 cents. There was a healthy improvement of 6% in revenues as well, with improvements seen in average revenues per user and churn rate. Perhaps these strong results have reflected in its stock price, which has shown an upward trend since the announcement of its second quarter results. Since our last report on PCS, the stock is up 55%. We previously recommended a long position on the stock, and we reiterate our previous stance.

The company recently launched its latest unlimited LTE data plan, which is going to cost customers $55 per month. This move has come after other telecom operators like AT&T (NYSE:T) and Verizon (NYSE:VZ) announced their service plans in attempts to lure bandwidth-hungry smartphone users. However, PCS has taken its promotional efforts one step further. Even though Verizon is offering unlimited plans at a lesser price than PCS, these unlimited plans are being offered on basic mobile devices and not on smartphones. Verizon is currently charging $30 per month for 2GB data and $80 for 10GB. On the other hand, PCS's cheapest unlimited talk, text and data plan is only $40 per month. PCS has offered another deal to families, which have to pay only $50 more per month if they get the second, third and fourth lines under its unlimited LTE plan. Moreover, the family plan will also carry unlimited talk, text and data features, which is a huge advantage not only for customers, but also for the company, as it will likely help the company recover from its subscriber losses in the quarter recently ended. PCS has also thrown in an LTE Android smartphone, the LG motion 4G, for $149 as part of its promotion strategy.

The company has recently launched the Coolpad Quattro 4G, which is going for $149 at its stores. It is the company's cheapest 4G LTE smartphone, which can be used with its various service plans, with all the taxes and fees included and of course, with no annual contract. The company had announced previously that it will launch more smartphones in the second half of the year. It has done exactly that with the launch of its coolpad Quattro, as well as the LG motion. Previously, the company had tremendous success with its $25 unlimited voice and texting plan, which was also the lowest price point at which the company had offered services to its customers.

PCS has become the first U.S. telecom operator to launch a voice-over LTE device. In a recent press release, the company announced that its LG connect smartphone will be on VoLTE support. However, the newly-launched service will only work on new LG handsets, and the company has also said that it plans to introduce more voice-over LTE phones in the second half of the year. The rollout of the VoLTE will allow the company to transfer voice traffic to its near-completed LTE network. The advantage of this new technology for consumers will be clearer calls as well as shorter connection periods. PCS has taken the lead once again, as Verizon and AT&T will not be deploying the technology until 2013.

In terms of financials, PCS is a growth story, as its revenues have grown at a CAGR of over 20% since the financial year ended 2007. Gross margins have remained around 40% despite the slow pace of the economy, which is an indication of its operational strength. Moreover, the company's gross margins have remained stable in times when other operators like AT&T and Verizon were experiencing a contraction in their margins. It has also been able to grow its earnings by over 30% over the last four years. The second quarter ended with improvements in almost all key business metrics, including average revenue per user, which jumped to $40.6 from $40.4 in 2Q2012, as well as churn, which decreased from 3.9% to 3.4%.

The stock is trading at 11 times its earnings, at a discount to the industry multiple of 16x, as well its five-year median forward P/E of 14.5x. On a forward P/E basis, PCS is trading at 13 times its earnings, while Verizon and AT&T are trading at 15.6x and 14.5x respectively. Valuations for PCS suggest the stock is currently undervalued. Currently, 82% of sell-side analysts have a hold rating on the stock.

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

Business relationship disclosure: The article has been written by Qineqt's Telecom Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article