A month has gone by since the last earnings report for United States Cellular (USM Quick QuoteUSM - Free Report) . Shares have added about 3.3% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is U.S. Cellular due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

U.S. Cellular Q3 Earnings Top Estimates, Revenues Flat

U.S. Cellular reported solid third-quarter 2020 financial results, with the top and the bottom lines surpassing the respective Zacks Consensus Estimate. Churn rate mitigation strategies and accretive subscriber base on the back of multiyear network modernization initiatives buoyed U.S. Cellular’s quarterly performance.

Net Income

Net income in the September quarter was $85 million or 97 cents per share compared with $23 million or 27 cents per share in the year-ago quarter. Despite relative flat revenue trajectory, the more than three-fold rise in earnings was primarily driven by lower operating costs and lower income tax expenses. The bottom line beat the Zacks Consensus Estimate by 67 cents.

Revenues

Quarterly total operating revenues remained relatively flat at $1,027 million. Lower data rates along with a decrease in new smartphone unit sales led to soft revenues. The top line surpassed the consensus estimate of $997 million. While service revenues inched up 0.1% to $775 million, the same from equipment sales declined 1.9% to $252 million.  

Although social distancing measures due to coronavirus fears are leading to less store traffic, the company witnessed a substantial low churn rate with increased demand for connected devices. This eventually benefited subscribers with advanced network infrastructure. Also, the company is focused to accelerate further growth opportunities with 5G deployments into additional markets on the back of incremental network investments, while addressing the accretive networking demands of customers.

Other Details

Total operating expenses declined 4.8% year over year to $962 million, primarily due to lower depreciation and amortization coupled with selling, general and administrative expenses. Operating income was $65 million compared with $20 million in the prior-year quarter. Adjusted EBITDA in the first nine months of 2020 came in at $841 million whereas adjusted OIBDA was $698 million.

Operating Metrics

While total cell sites in service were 6,758 at the end of the reported quarter compared with 6,554 a year ago, the company-owned towers were 4,246, up from 4,123. As of Sep 30, 2020, postpaid ARPU increased to $47.10 from $46.16 and postpaid ARPA (average revenue per account) rose to $123.27 from $119.87. Postpaid churn declined to 1.06% from 1.38% reported in the year-ago quarter. Prepaid ARPU increased to $35.45 from $34.35, while prepaid churn fell to 3.59% from 4.03%.

Cash Flow & Liquidity

During the first nine months of 2020, U.S. Cellular generated $950 million of net cash from operations compared with $687 million in the year-ago quarter. In the same period, the company’s non-GAAP free cash flow totaled $260 million compared with $248 million in the prior-year quarter.

As of Sep 30, 2020, the wireless telecommunications service provider had $931 million in cash and cash equivalents with $2,108 million of net long-term debt.

2020 Guidance Updated

U.S. Cellular has provided revised guidance for full-year 2020. The company anticipates service revenues in the band of $3,025-$3,075 million compared with prior expectation of $3,000-$3,100 million. Adjusted EBITDA is projected in the range of $975-$1,050 million versus previous outlook of $900-$1,025 million. U.S. Cellular’s adjusted OIBDA is expected in the band of $800-$875 million, up from $725-$850 million. However, capital expenditures remained unchanged and are expected between $850 million and $950 million.

Going Forward

U.S. Cellular continues to strengthen its customer base while improving churn management and enhancing brand positioning. With judicious expense management, the company is making efforts to provide essential products and services. Markedly, the company achieved a 5G millimeter wave milestone in collaboration with leading tech behemoths — Qualcomm and Ericsson. It also made some organizational changes in the reported quarter while continuing to enjoy strong subscriber base on the back of low churn rate.

Progressing with 5G and multiyear network modernization initiatives, the company aims to attract new customers by providing superior quality network and national coverage. Despite uncertainties stemming from COVID-19 pandemic, U.S. Cellular is focused to create an enhanced network experience and generate new revenue opportunities that could positively impact U.S. Cellular’s profitability in the near term.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -366.67% due to these changes.

VGM Scores

At this time, U.S. Cellular has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, U.S. Cellular has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.