Monetizing Spectrum And Expanding 5G To Propel Growth Amidst Competitive Challenges

Key Takeaways

• Enhanced network capacity with mid-band 5G deployment aimed at handling significant data traffic, hinting at better customer satisfaction and subscriber growth.
  
• Strategic initiatives like monetizing spectrum, launching TDS Mobile, and leveraging owned towers aimed at boosting revenue growth and improving operational efficiencies.
  
• Pending sale to T-Mobile and strategies for subscriber growth amidst competitive pressures could risk regulatory issues, margin pressure, and affect market share, cash flow, and profitability.

Catalysts

Provides wireless telecommunications services in the United States.

• Active process to monetize the remaining 70% of spectrum that T-Mobile will not be purchasing, presenting an opportunity to unlock significant value, impacting future revenue growth.
  
• Commitment to enhanced network capacity and speeds via ongoing mid-band 5G deployment, expected to handle 50% of data traffic by the end of 2024, potentially boosting customer satisfaction and subscriber growth.
  
• Focused cost efficiency programs leading to reduced expenses across major categories, even with the rollout of 5G, indicating potential for improved net margins through managed operational costs.
  
• Introduction of TDS Mobile, an MVNO offering, expected to complement broadband services and enable the bundling of competitive products, likely contributing to increased ARPU and customer retention.
  
• Leveraging nearly 4,400 owned towers and strategic partnerships for 15 years under the new MLA, creating a long-term foundation for third-party tower revenues, impacting both revenue growth and adjusted OIBDA margins.

Assumptions

• Analysts are assuming United States Cellular's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 3.7% in 3 years time.
• Analysts expect earnings to reach $141.4 million (and earnings per share of $1.61) by about October 2027, up from $71.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $73.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.6x on those 2027 earnings, down from 74.8x today. This future PE is greater than the current PE for the US Wireless Telecom industry at 14.8x.
• Analysts expect the number of shares outstanding to grow by 0.76% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The pending transaction with T-Mobile for the sale of UScellular's wireless operations could introduce risks associated with regulatory approval delays or failure to obtain approval, impacting future earnings and operational capabilities.
  
• UScellular's strategies to improve subscriber trajectory through various promotional changes, while prudent, could risk margin pressure or unsustainable subscriber acquisition costs, impacting net margins.
  
• The competitive environment, particularly with aggressive carrier promotions and cable wireless competition, poses a significant risk to UScellular’s ability to retain market share, potentially affecting revenue growth.
  
• The process to monetize the remaining 70% of its spectrum not being purchased by T-Mobile is ongoing and uncertain. Failure to unlock significant value from these assets could negatively impact future cash flow and investment capacity.
  
• The shift towards reporting operations in two segments (wireless and towers) following the pending transaction with T-Mobile poses risks in effectively managing and optimizing each business unit, potentially affecting overall company profitability and strategic focus.

Valuation

• The analysts have a consensus price target of $66.67 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 $75.0, and the most bearish reporting a price target of just $52.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.9 billion, earnings will come to $141.4 million, and it would be trading on a PE ratio of 48.6x, assuming you use a discount rate of 5.8%.
• Given the current share price of $61.8, the analyst's price target of $66.67 is 7.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.