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US Cellular (USM)

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We are downgrading our recommendation on US Cellular (USM) to Underperform as the company faces many challenges. Most of the regional markets are extremely competitive and this has become more evident following the consolidations among several large carriers.

The integration of Dobson Cellular/Cingular/AT&T Wireless, Sprint/Nextel merger, consolidation of Verizon Wireless/Alltel in January 2009 and AT&T s acquisition of Centennial Communications have resulted in Tier-1 carrier expansion into sparser geographical markets. As a result, U.S. Cellular continues to be susceptible to aggressive pricing by larger rivals.

Moreover, the company's high-margin roaming revenues remain under pressure, which is particularly troublesome given its strong reliance on roaming fees. Our price target is $42.00, based on 28.4x our 2011 earnings estimate.

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