5G And Fiber Expansion Will Strengthen Network Capacity For Future Demands

Key Takeaways

• Wireless operations sale to T-Mobile and spectrum transactions are set to unlock value and improve shareholder equity.
  
• 5G deployment and fiber expansion enhance network capacity, potentially boosting revenue and profitability through improved services and cost optimization.
  
• Declining service revenues, competitive pressures, and high costs pose challenges to UScellular's market share, profitability, and financial stability, compounded by uncertainties from the T-Mobile deal.

Catalysts

Provides wireless telecommunications services in the United States.

• UScellular's agreement to sell its wireless operations to T-Mobile and other spectrum transactions could unlock significant value, allowing them to return capital to shareholders. This is likely to positively impact the company's capital structure and shareholder equity.
  
• The ongoing deployment of mid-band 5G spectrum will expand UScellular's network capacity and speed, potentially boosting revenue through improved customer acquisition and retention due to enhanced service offerings.
  
• UScellular's tower assets and the increase in co-locators, particularly through agreements with T-Mobile, are expected to strengthen the tower business and improve recurring revenue streams, positively affecting net margins.
  
• The strategic emphasis on cost optimization and the completion of 5G deployments should lead to reduced capital expenditures and increased free cash flow, which will likely enhance overall profitability and earnings stability.
  
• The continued investment in fiber optic expansion through TDS Telecom, increasing their footprint by 30% over the past three years, positions them well for future revenue growth from high-demand residential broadband services.

United States Cellular Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming United States Cellular's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.0% today to 5.9% in 3 years time.
• Analysts expect earnings to reach $220.0 million (and earnings per share of $2.5) by about March 2028, up from $-39.0 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 34.3x on those 2028 earnings, up from -134.8x today. This future PE is greater than the current PE for the US Wireless Telecom industry at 11.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.32%, as per the Simply Wall St company report.

United States Cellular Future Earnings Per Share Growth

Risks

• The decline in service revenues due to decreases in the average retail subscriber base highlights challenges in maintaining and growing customer numbers, potentially affecting future revenue and earnings stability.
  
• The competitive environment and size limitations of UScellular's operations are noted concerns, which could hinder UScellular’s ability to capture market share, impacting earnings and net margins.
  
• The transaction with T-Mobile, while strategic, is contingent on regulatory approvals and other closing conditions. Any delay or failure to close the deal could impact projected cash proceeds and financial health.
  
• High promotion and retention expenses have resulted in increased costs associated with equipment sales, which could compress net margins and affect overall profitability.
  
• There are notable costs and risks associated with the employee transition, potential severance obligations, and tax liabilities related to the T-Mobile transaction, which could negatively affect net margins and cash flow.

Valuation

• The analysts have a consensus price target of $73.84 for United States Cellular based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $88.0, and the most bearish reporting a price target of just $53.2.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.7 billion, earnings will come to $220.0 million, and it would be trading on a PE ratio of 34.3x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $61.8, the analyst price target of $73.84 is 16.3% 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.