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Why Is U.S. Cellular (USM) Down 16.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for United States Cellular (USM - Free Report) . Shares have lost about 16.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is U.S. Cellular due for a breakout? 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 drivers.

United States Cellular Q4 Earnings Top, Revenues Match

United States Cellular reported decent fourth-quarter 2018 financial results wherein non-GAAP earnings per share surpassed the Zacks Consensus Estimate and increased year over year.

Net Income

On a GAAP basis, net income for the quarter was $21 million or 23 cents per share compared with $273 million or $3.18 per share in the year-ago quarter, primarily due to lower income tax benefit. For full-year 2018, net income was $150 million or $1.72 per share compared with $12 million or 14 cents per share in 2017.

Quarterly non-GAAP net income came in at $21 million or 23 cents per share compared with $4 million or 5 cents per share in the prior-year quarter, beating the Zacks Consensus Estimate by 9 cents.

Revenues

Quarterly total operating revenues increased 2.1% year over year to $1,051 million on the back of higher equipment sales. The top line matched the consensus estimate. While revenues from Service remained almost steady year over year at $754 million, the same from Equipment sales were up 8.4% to $297 million driven by sales growth in higher-priced devices and accessories. For full-year 2018, revenues improved 2% to $3,967 million.

Other Quarterly Details

Total operating expenses were up 1.5% year over year to $1,048 million. Operating income was $3 million against loss of $4 million in the prior-year quarter.

Operating Metrics

While total cell sites in service were 6,531 at the end of the reported quarter compared with 6,460 a year ago, company-owned towers were 4,129 compared with 4,080. As of Dec 31, 2018, postpaid ARPU (average revenue per user) increased to $45.58 from $44.12, postpaid ARPA (average revenue per account) was $119.60 compared with $118.05. Postpaid churn rose to 1.29% from 1.27% a year ago. Prepaid ARPU increased to $32.80 from $32.42 and prepaid churn decreased to 4.98% from 5.09%.

Cash Flow and Liquidity

For full-year 2018, U.S. Cellular generated $709 million of net cash from operating activities compared with $469 million in 2017. For 2018, the company’s non-GAAP free cash flow totaled $197 million compared with $4 million in 2017.

As of Dec 31, 2018, the wireless telecommunications service provider had $580 million in cash and equivalents with $1,605 million of net long-term debt compared with the respective tallies of $352 million and $1,622 million a year ago.

2019 Guidance

Backed by healthy operating performance in 2018, U.S. Cellular has provided estimates for full-year 2019. The company currently expects total operating revenues in the band of $4,100-$4,300 million. Adjusted EBITDA is projected in the range of $900-$1,050 million. The company anticipates adjusted OIBDA in the range of $725-$875 million. Capital expenditures are expected to be between $625 million and $725 million.

Moving Forward

U.S. Cellular has taken significant steps to accelerate subscriber additions and improve churn management. The company aims to offer the best wireless experience to customers by providing superior quality network and national coverage. Moreover, it is well poised to support the investment required for network enhancements, including deployment of 5G technology. The company continues strengthening its customer base, identifying new revenue streams while reducing expenses across the business. In addition, it is expanding footprint across Sioux City, Iowa and Northern Wisconsin while adopting unlimited plans to enhance ARPU. It has made progress on strategic objectives, growing customer base by increasing handset connections and customer loyalty to boost revenues and profitability.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -18.75% due to these changes.

VGM Scores

At this time, U.S. Cellular has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. 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. It's no surprise U.S. Cellular has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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