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Balanced View on US Cellular

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On Sep 4, 2013 we maintained our Neutral recommendation on wireless service provider United States Cellular Corporation or US Cellular (USM - Free Report) . We expect the company to register impressive smartphone sales based on continuous launch of new devices including Apple Inc.’s (AAPL - Free Report) iPhone. However, stiff competition and pricing pressure would remain detrimental to customer accretion. This Chicago-based company holds a Zacks Rank #3 (Hold).

Why Maintained?

We foresee accelerated growth for US Cellular in the future based on a number of strategic actions, including introduction of a new billing system, expansion of distribution channel, deployment of 4G LTE and launch of LTE devices. The company remains optimistic on growing smartphone demand, which will support data revenue growth. Additionally, over the near term, rapid transition of the wireless market from the 3G to 4G LTE space and the demand for 4G devices are expected to remain high.

U.S. Cellular has instituted several marketing initiatives including the introduction of four new bundled services that offer unlimited Internet and messaging plans with highly coveted features, at affordable prices. This initiative is expected to reduce the company’s churn going forward.

U.S. Cellular is focused on selling its non-core spectrum and sold some of its PCS spectrum to Sprint in Nov 2012. Recently, U.S. Cellular also signed an agreement to sell its non-strategic spectrum in the Mississippi valley to a wholly owned subsidiary of T-Mobile US Inc. (TMUS - Free Report) for $308.0 million. We believe this transaction will provide it the liquidity to expand LTE network.

Nevertheless, customer churn remains the primary concern for U.S. Cellular, and the absence of the iPhone has only aggravated the problem. 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 revenue remains 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 or spectrum licensing are also expected to put considerable pressure on the company’s margins. These risks force us to maintain a neutral stance on the wireless carrier.

Other Stocks

While we remain sidelined on US Cellular, Zacks Ranked #2 (Buy) Cincinnati Bell (CBB - Free Report) looks attractive for the short term.

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