We are currently maintaining our long-term Neutral recommendation on Telephone and Data Systems Inc. (TDS). The stock retains a Zacks # 2 (Buy) Rank for the short term.
The company is a diversified telecom service provider offering wireless services through its subsidiary U.S. Cellular Corp. (USM) and wireline services through TDS Telecom.
Telephone and Data Systems is pursuing several initiatives to reinvigorate growth including expansion of its 3G network, handset offerings and potential adoption of 4G Long-Term Evolution technology in the wireless business. The company is also aggressively deploying Triple-Play bundled wireline services through Dish Network Corp.’s (DISH) TV services. However, these positives are curbed by significant challenges in the wireless business as well as stiff competition from cable operators and Internet-based service providers in the wireline space.
This is evident form the second quarter results. Persistent erosion in access lines offset data growth in the wireline segment. Going forward, Telephone and Data Systems continues to experience declines in access lines due to wireless substitution and other alternative services. In addition, stringent regulatory measures might hurt future profitability.
Coming to wireless, strong inbound roaming and retail service revenues led to the improved performance in the segment. Nevertheless, roaming revenue might decline in the upcoming years owing to further industry consolidation and continued build-outs by other wireless carriers. The past acquisition of Alltel by Verizon Communication Inc. (VZ) negatively affected roaming revenue as the combined entity significantly reduced the use of U.S. Cellular’s network capacity for roaming.
Additionally, higher expenses associated with the expansion of its wireless network might limit the upside potential of the stock. Further, the company’s wireless business depends on the ability to use portions of the radio spectrum licensed by Federal Communications Commission. Telephone and Data Systems could fail to obtain access to sufficient spectrum capacity in new or existing markets thus affecting wireless revenues.
Besides 3G and 4G expansions, Telephone and Data Systems is growing its operations in managed hosting and cloud services offerings. The company acquired a data hosting and information technology company, OneNeck IT Services, in July. In this regard, Telephone and Data Systems is way ahead of AT&T Inc. (T) and CenturyLink Inc. (CTL). The former plans to invest $1 billion in late 2011 while the latter plans to buy Savvis in the second half of the year. Telephone and Data Systems remains close behind its largest rival Verizon, which started offering its competitive services in April following the acquisition of Terremark Worldwide.
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