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We reaffirm our long-term Neutral recommendation on Leap Wireless International Inc. based on our assessment that the stock is currently fairly valued.

Why Kept at Neutral?

Leap Wireless reported mixed financial results for the fourth quarter of 2012. The bottom line topped the Zacks Consensus Estimate but the top line missed the same. However, the company continues to suffer huge losses despite beating the Zacks Consensus Estimate.

Further, Leap Wireless lost a significant amount of subscribers in the reported quarter. The company’s consolidated churn rate was 4.6% compared with 3.9% in the prior-year quarter.

Meanwhile, the stock price plummeted 44% in the last year, which may provide a cushion to the stock price. Leap Wireless restructured its business model to emphasize on higher ARPU (average revenue per user) generating smartphone subscribers, while shedding the less profitable wireless broadband subscribers. In the reported quarter, ARPU nudged up by1.5% year over year to $42.73. Leap Wireless currently has a Zacks Rank #3 (Hold).

Balanced View on Leap Wireless

A major problem for Leap Wireless is the growing competitive pressure in the prepaid wireless segment due to industry consolidation. Its closest competitor, MetroPCS Communications Inc. recently received the approval of the Federal Communications Commission for its proposed merger with T-Mobile USA, the fourth largest telecom operator in the U.S. Boost Mobile and Virgin Mobile U.S.A. are the subsidiaries of Sprint Nextel Corp. (S - Analyst Report), the third largest telecom carrier in the U.S.

Another competitor, Tracfone, is the subsidiary of America Movil SAB (AMX - Analyst Report), which is controlled by world’s richest person, Carlos Slim.

Nevertheless, we believe Leap Wireless remains one of the low-cost wireless service providers in the U.S., which enables it to roll out a range of cheap service plans.The company has decided to offer LTE services in two-third of its overall network foothold in the next 2-3 years.Leap Wireless also plans to expand coverage in urban and suburban markets while avoiding less populated areas to keep its infrastructural cost low.   

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