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Rating agency, Moody’s Investor service has upgraded its outlook on Leap Wireless International Inc. ( LEAP - Analyst Report ) from negative to stable on the back of the prepaid carrier's plan to trim down its debt.
Leap Wireless’s wholly-owned subsidiary Cricket Communications Inc. has announced that it has arranged a term loan facility of $400 million to pay back its existing 10% senior notes of $300 million due on 2015, this is attributable for the raised outlook. The remaining proceeds from the loan will be used for general corporate purposes.
Recently, Leap Wireless declared dismal second-quarter 2012 results, wherein both revenue and EPS fell short of the Zacks Consensus Estimates. The slump in quarterly result was buoyed by increased churn rate. Leap currently holds Moody’s B2 rating, which is five notches above the junk category.
To transcend this tough situation, the company is trying to reduce its operating costs other than considering asset sale options. The company has declared to reduce its capital spending by 13% for 2012. We believe controlled capital spending coupled with the debt reduction effort will help the company to improve operation, which in turn will help the company to improve its cash flow situations.
The pay-as-you-go carrier has vowed to offer the latest iPhone 5 from September 25, 2012. It will be the first company to launch prepaid iphone5 and will be mainly targeting the young customers. Though it faces stiff competition from the likes of Verizon Communication Inc. ( VZ - Analyst Report ) and AT&T Inc. ( T - Analyst Report ) , we believe its lower tariff plan will mainly attract the low-end customers of these national carriers. However, if the company’s strategic initiative fails to deliver it could face further cut in ratings from Moody’s.
The current Zacks Consensus Estimate for Leap Wireless International Inc. is pegged at ($0.76) for the third quarter of 2012 with a growth rate estimate of 15.33%. For 2012, the Zacks Consensus Estimate stands at ($3.84) with a growth rate of 6.49% while for 2013, the Zacks Consensus Estimate stands at ($3.11) with a growth rate of 19.12%.
We retain our long-term Neutral recommendation on Leap Wireless Inc. Currently, it has a Zacks #3 Rank, implying a short-term Hold rating.
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