We are maintaining Neutral recommendation on MetroPCS Communications (PCS). The company’s third quarter performance surpassed the Zacks Consensus Estimate and the prior-year results on strong operating results.
We believe that MetroPCS stands to benefit from being one of the lowest cost wireless service providers in the U.S. that enables it to roll out a range of cheap service plans. While the company continues to seek spectrum opportunities, enhancing network capacity through technology remains a cost-effective, near-term alternative. MetroPCS is also expected to reap benefits from the mobile broadband momentum success of “Wireless for All” service plans that foster continued financial and subscriber growth.
MetroPCS also remains advantageously poised to benefit from the emerging market of prepaid services that are expected to account for approximately one-fourth of the wireless market share by 2018 given the rapidly drifting interest of customers from post-paid because of economic pressure. The company offers its services under attractive fixed-rate, unlimited usage-based price plans that do not require customers to enter into long-term contracts and keep minimum balances or deposits.
Additionally, MetroPCS is focused on expanding its footprint in the 4G long-term evolution (:LTE) market and launched the “4G LTE for All” program in August. The advanced 4G LTE network, cost effective 4G devices and affordable 4G service plans are expected to remain the key drivers of MetroPCS’ 4G LTE for All program. The company has already deployed high-speed 4G LTE services in most of its major markets and covers 97% of its market with a 5x5 megahertz channel bandwidth.
However, MetroPCS operates in an intensely competitive domestic low-cost prepaid wireless market. At the regional level, the company competes head-to-head with Leap Wireless (Cricket) and Pocket Communications. The company has been increasingly challenged by the aggressive rollout of competitive price plans by some of its larger rivals such as AT&T (T), Verizon Communications (VZ) and Sprint Nextel Corp. (S) to capitalize on the attractive growth opportunity in the prepaid segment.
MetroPCS service plans include applicable taxes and regulatory fees. If the government and regulatory agencies increase the taxes and regulatory fees, then the company may have to switch to higher cost plans. This may lead to higher customer churn and lower subscriber addition that will hurt the company’s revenue and profit.
The dynamics of the wireless industry is significantly governed by technological innovations. The company’s relatively backdated CDMA network platform does not support smartphone offerings and is increasingly becoming a headwind to churn rates that have increased significantly over the past quarters.
Hence, we see the stock as having limited upside potential and expect MetroPCS to perform in line with the broader market.
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