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Here's Why You Should Hold U.S. Cellular Amid Mixed Results

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On Aug 8, U.S. Cellular Corp. (USM - Free Report) , the wireless subsidiary of Telephone & Data Systems Inc. (TDS - Free Report) , was downgraded by a notch to Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance

The price performance of U.S. Cellular has been encouraging over the past three months. The company’s shares have inched up 4.75% compared with the industry’s gain of 1.83%.

Positives

U.S. Cellular’s top priority has always been subscriber additions and churn management. To this end, the company has undertaken different calculative and judicious business moves such as the introduction of a new billing system, continuous rollout of 4G LTE, enhancement of LTE handsets, completion of various spectrum transactions and monetization of non-strategic assets.

Shared Connect plans which offer more data, larger allotments and unlimited offerings bode well. The company’s decision to upgrade its existing prepaid plans by increasing the amount of data available has lured more prepaid subscribers. In the reported quarter, the company has gained 3,000 prepaid customers. As of Jun 2017, prepaid subscriber base totaled 484,000, flat year over year.

U.S. Cellular is also optimistic about its collaboration with Ericsson (ERIC - Free Report) for 5G network trials. This is followed by the growing demand for smartphones, which enjoy significant market penetration while supporting growth in data revenues. The company is also focused on various cost cutting initiatives.

Negatives

U.S. Cellular operates in an intensely competitive wireless market and remains significantly challenged by lower-cost mobile service plans from competitors. On a regional level, the company competes head-to-head with AT&T Inc. (T - Free Report) owned Leap Wireless.

Additionally, high costs associated with network integration and construction of cell sites, aggressive pricing by larger rivals and the ongoing consolidation in the wireless industry through mergers, acquisitions and joint ventures are other risks to the company’s growth prospects.

The company’s cash and liquidity scenario was also stressful. U.S. Cellular exited the second quarter of 2017 with cash and cash equivalents of $472 million compared with $586 million at the end of 2016. Total debt was $1,624 million compared with $1,629 million at the end of 2016. The debt-to-capitalization ratio at the end of second-quarter 2017 was 0.30 compared with 0.31 at 2016-end. The accumulating debt and declining cash flows might affect the company's future financial prospects, thereby affecting the company's credit ratings also. We wait to see if it recovers in the next quarter results.

Earnings Updates

Let’s have a look at the company’s performance in the reported second-quarter 2017 earnings releases, in certain important metrics.

U.S. Cellular posted mixed financial results in the second quarter of 2017. While the top line surpassed the Zacks Consensus Estimate, the bottom line met the mark.

GAAP net income amounted $12 million or 14 cents per share compared with a net income of $27 million or 32 cents in the year-ago quarter. However, quarterly adjusted earnings per share of 17 cents were in line with the Zacks Consensus Estimate.

Quarterly total revenue of $963 million was down 3% year over year outpacing the Zacks Consensus Estimate of $950.6 million. Quarterly Service revenues decreased 4% to $740 million. Revenues from Equipment sales increased 2% to $223 million.

Quarterly operating expenses decreased 1% to $958 million. Operating income was a mere $5 million compared with $30 million in the prior-year quarter. Total cell sites in service were 6,421 compared with 6,415 at the end of 2016. Total company owned towers were 4,044 compared with 4,040 at the end of 2016.

Latest Updates on U.S. Cellular

On Jul 25, U.S. Cellular launched an online and in-store presale for the Moto Z2 Force Edition from Motorola, combined with unlimited data. It starts as low as $40 per line/month for four lines and many more additional perks.

On Jun 16, U.S. Cellular announced to offer free iPhone 7 to subscribers who switch to its network from rival carriers in a bid to attract new customers.

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