Cash From Wireless Sale Will Fund Fiber Expansion And Optimize Capital Structure

Key Takeaways

• Strategic transactions, including selling its wireless business, are expected to inject cash, optimize capital structure, and benefit earnings and cash flow.
  
• Heavy fiber investment will drive growth, with focus on asset optimization and expanded 5G deployment to improve long-term revenue and profitability.
  
• The sale to T-Mobile involves regulatory uncertainty, revenue decline from a shrinking subscriber base, and potential cash tax obligations impacting future growth and net margins.

Catalysts

A telecommunications company, provides communications services to consumer, business, and government in the United States.

• TDS and UScellular are advancing strategic transactions, including the sale of the wireless business to T-Mobile and other spectrum transactions, which are expected to provide a significant infusion of cash. Proceeds will be used to optimize capital structure and potentially return capital to shareholders, positively impacting earnings and free cash flow.
  
• The company is heavily investing in expanding its fiber footprint through the E-ACAM program and additional strategic builds, projecting 1.8 million marketable fiber service addresses. This focus is expected to drive future revenue growth and improved margins.
  
• UScellular is focusing on optimizing its assets, specifically its owned towers, by leveraging an MLA with T-Mobile, anticipated to enhance occupancy and drive stronger long-term revenue streams and profitability through sustained demand for telecom infrastructure.
  
• TDS Telecom’s strategy to transform into a fiber-centric organization, increasing fiber service addresses and investing in internal construction capabilities, is projected to enhance operational efficiencies and reduce costs, facilitating margin expansion and supporting earnings growth.
  
• The ongoing rollout of 5G mid-band deployment and the emphasis on increasing penetration in fiber markets supported by enhanced sales and marketing efforts are anticipated to bolster customer acquisition and retention, driving up revenues and potentially improving net margins.

Telephone and Data Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Telephone and Data Systems's revenue will decrease by 1.8% annually over the next 3 years.
• Analysts are not forecasting that Telephone and Data Systems will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Telephone and Data Systems's profit margin will increase from -2.0% to the average US Wireless Telecom industry of 10.3% in 3 years.
• If Telephone and Data Systems's profit margin were to converge on the industry average, you could expect earnings to reach $483.2 million (and earnings per share of $4.17) by about April 2028, up from $-97.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.7x on those 2028 earnings, up from -42.2x today. This future PE is greater than the current PE for the US Wireless Telecom industry at 13.9x.
• Analysts expect the number of shares outstanding to grow by 0.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.85%, as per the Simply Wall St company report.

Telephone and Data Systems Future Earnings Per Share Growth

Risks

• The agreement to sell the wireless business to T-Mobile is contingent upon regulatory approvals and other closing conditions, which introduces a level of uncertainty that could impact the transaction's completion and associated revenue from such deals.
  
• Although profitability and free cash flow increased in 2024, the company's service revenues declined due to a decrease in the average retail subscriber base, indicating potential challenges in sustaining revenue growth.
  
• Capital expenditures are expected to decline as the 5G deployment cycle progresses, which might limit future growth potential if not appropriately balanced with investment in new ventures or technologies.
  
• The company faces potential cash income tax obligations related to the gain on sale transactions and anticipated legal, advisory, and investment banking fees, which could significantly impact net margins.
  
• The transition and integration post-T-Mobile transaction could present challenges in maintaining operational efficiency and subscriber growth, given the competitive environment and UScellular's lack of scale, impacting net income and revenue stability in the short term.

Valuation

• The analysts have a consensus price target of $53.5 for Telephone and Data Systems based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.7 billion, earnings will come to $483.2 million, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 6.8%.
• Given the current share price of $36.16, the analyst price target of $53.5 is 32.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.