On Jan 9, 2014 we updated our research report on wireless service provider United States Cellular Corporation (USM). We expect U.S. Cellular to gain from LTE expansion and smartphone sale, which are likely to drive earnings going ahead. However, stiff competition and heavy subsidies on smartphones can affect margins. This Chicago-based company currently holds a Zacks Rank #3 (Hold).
U.S. Cellular has taken a number of strategic actions including introduction of a new billing system, expansion of distribution channels, continuous rollout of 4G LTE, enhancement of LTE handsets and closing of various spectrum transactions that will accelerate growth in the future.
With the introduction of the new billing system, the company has witnessed substantial branding power resulting in an improvement in churn rate. Investment in 4G LTE will allow the company to offer popular services like shared data plans and connected devices over a superfast network.
U.S. Cellular is optimistic about the growing demand for smartphones, which enjoys a market penetration of 53%, supporting growth in data revenues. The addition of Apple Inc.’s (AAPL) iPhone in the fourth quarter of 2013 has enriched the company’s portfolio while also increasing customer choice.
To increase smartphone penetration, the company has also initiated Shared Data plans for consumers and businesses, starting at $40 per month, for which it is getting good customer response. Additionally, the recently rolled out device instalment plan is expected to offset losses on smartphone subsidies.
However, the company’s first quarter results were disappointing as the company continued to lose money and subscribers. Customer churn remains the primary concern in the U.S. and billing constraint in the early part of 2014 has only aggravated the issue. Moreover, higher mix of smartphones and higher subsidies on 4G LTE devices will continue to increase the company’s expenses.
Meanwhile, U.S. Cellular’s high-margin roaming revenues remain under pressure based on lower voice usage and lower voice and data ARPU. High costs associated with network integration and construction of new cell sites, increasing capacity in existing cell sites, upgrading wireless technology and spectrum licensing are also expected to put considerable pressure on the company’s margins. These risks force us to maintain a balanced view on the wireless carrier.
Other Stocks
While we remain on the sidelines regarding USM at present, Zacks Ranked #2 (Buy) Level 3 Communications Inc. (LVLT) and Kyocera Corp. (KYO) look attractive for the short term.
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