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Why Is U.S. Cellular (USM) Down 22.5% 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 22.5% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important drivers.

U.S. Cellular Trumps Q4 Earnings & Revenue Estimates

U.S. Cellular reported robust fourth-quarter 2019 financial results, wherein both the top and bottom line surpassed the Zacks Consensus. The company’s unlimited pricing plans and higher average revenue per user (ARPU) contributed to growth in service revenues.

Net Income

On a GAAP basis, net income in the December quarter was $18 million or 20 cents per share compared with $21 million or 23 cents per share in the year-ago quarter. The year-over-year decline was primarily due to higher operating expenses, which stemmed from infrastructure investments. The bottom line, however, surpassed the Zacks Consensus Estimate by 16 cents. In full-year 2019, net income came in at $127 million or $1.44 per share compared with $150 million or $1.72 per share in 2018.

Revenues

Quarterly total operating revenues remained relatively flat at $1,052 million. The top line surpassed the consensus estimate of $1,045 million. While revenues from service increased 1.2% year over year to $763 million, the same from equipment sales were down 2.7% to $289 million. Full-year 2019 revenues rose 1.4% to $4,022 million from $3,967 million on the back of higher roaming revenues, increased device protection services penetration and accretive subscriber base.

Other Details

Total operating expenses were up 0.7% year over year to $1,055 million, primarily due to higher depreciation and amortization charges, and selling, general and administrative expenses. Operating loss was $3 million against operating income of $3 million in the prior-year quarter. Adjusted EBITDA grew 4.2% to $222 million.

Operating Metrics

While total cell sites in service were 6,578 at the end of the reported quarter compared with 6,531 a year ago, company-owned towers were 4,166 compared with 4,129. As of Dec 31, 2019, postpaid ARPU increased to $46.57 from $45.58, postpaid ARPA (average revenue per account) was $120.99, up from $119.60. Postpaid churn rose to 1.38% from 1.29% reported a year ago. Prepaid ARPU increased to $34.11 from $32.80 and prepaid churn decreased to 4.40% from 4.98%.

Cash Flow & Liquidity

In 2019, U.S. Cellular generated $724 million of net cash from operations compared with $709 million a year ago. In the year, the company’s non-GAAP free cash flow totaled $74 million compared with $197 million in 2018.

As of Dec 31, 2019, the wireless telecommunications service provider had $285 million in cash and equivalents with $1,502 million of net long-term debt compared with respective tallies of $580 million and $1,605 million a year ago.

2019 Highlights

With continued focus on the cost structure, U.S. Cellular’s revenue growth witnessed an increase of 13% in inbound roaming revenues with significant growth in postpaid and prepaid average revenue per user. With 71,000 smartphone connections, the company has been successful in fortifying its subscriber base. Markedly, it invested considerably in 5G, dynamic network management, network modernization, spectrum and data capacity.

2020 Guidance

U.S. Cellular has provided estimates for full-year 2020. The company currently expects service revenues in the band of $3,000-$3,100 million. Adjusted EBITDA is projected in the range of $950-$1,075 million. The company anticipates adjusted OIBDA in the band of $775-$900 million. Capital expenditures 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. It is progressing with its 5G and network modernization initiatives. Focusing on cost-effective initiatives, the company intends to offer the best wireless experience to customers by providing superior quality network and national coverage. Further, it is on track to optimize its strength in network services to launch 5G services in two markets with planned launches in Iowa and Wisconsin in the first quarter of 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 18.38% due to these changes.

VGM Scores

At this time, U.S. Cellular has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, U.S. Cellular has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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