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TDS Reaffirmed at Neutral

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On Sep 13, 2013 we retained our Neutral recommendation on Telephone and Data Systems Inc. (TDS - Free Report) . We remain encouraged by several initiatives taken by the company including increasing handset offerings and expansion of LTE technology in the wireless business.

However, higher churn in the post-paid segment, increased equipment subsidies and investments in network upgrade would continue to weigh on the company’s performance. This Chicago-based company has a Zacks Rank #3 (Hold).

Why Maintained?

TDS’s Wireless subsidiary United States Cellular Corporation (USM - Free Report) is concentrating on increasing growth in the future and has taken a number of strategic actions, including introduction of bundled and unlimited service plans, a new billing system, deployment of 4G LTE and expansion of distribution channel.

The company also remains optimistic on the 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. To tap this opportunity, the company has launched several new LTE devices and is expected to offer the newly launched Apple Inc.’s (AAPL - Free Report) iPhone.

Expansion into the rapidly developing managed hosting and cloud service is expected to boost the company’s performance going forward. To support its growth in cloud based service, the company acquired Vital Support Systems, LLC for $45 million. Furthermore, to enhance its high-speed broadband and voice services the company recently acquired Baja Broadband LLC, for $267.5 million.

However, cut-throat pricing competition from rivals has resulted in higher post-paid churn for TDS. Aggressive distribution and promotional activity of larger rivals also remain detrimental to the company’s subscriber acquisition and retention abilities. Moreover, higher smartphone subsidies will continue to weigh on its margins.

TDS continues to experience declines in access lines due to wireless substitution and other alternative services. Competition has intensified further as cable operators offer voice telephony service on high-speed Internet links via cable modems (Voice over Internet Protocol).

Meanwhile, U.S. Cellular’s high-margin roaming revenue remains under pressure due to 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 negatives force us to maintain a neutral stance on the wireless carrier.

Other Stocks

While remain sidelined on US Cellular, Zacks Ranked #1 (Strong Buy) Hawaiian Holdings Inc. (HA - Free Report) looks attractive for the short term.

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