Tactical Spectrum Sale And 5G Expansion Signal A Profitable Future For UScellular

Key Takeaways

• Spectrum sales and strategic partnerships with T-Mobile are expected to improve cash flow, tower revenue, and enhance earnings.
  
• Efforts on cost optimization and 5G investments aim to boost profitability, network capability, and revenue through premium service adoption.
  
• Regulatory hurdles and high cash taxes from transactions could hinder cash flow, while reduced subscriber base and spending may impact long-term competitiveness and revenue growth.

Catalysts

Provides wireless telecommunications services in the United States.

• UScellular is in the process of selling portions of its spectrum, valued in excess of $1 billion, which is expected to enhance cash flow and profitability through spectrum monetization and potential operational synergies post-transaction. This could positively impact net margins and earnings.
  
• The strategic transaction with T-Mobile is projected to provide long-term benefits, including a strengthened tower business and an additional long-term tower tenant, which may lead to increased tower revenue and improved earnings.
  
• Cost optimization actions and efficiency improvements on expenses related to network operations and sales are set to sustain strong profitability, potentially boosting net margins and earnings.
  
• Continued investment and expansion in 5G technology are likely to enhance UScellular’s network capacity and performance, potentially leading to increased revenues from improved service offerings and customer satisfaction.
  
• The company’s strategy to increase higher-tier plan adoption, evidenced by a 2% increase in postpaid ARPU, indicates potential for revenue growth by shifting customers to more premium services.

United States Cellular Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming United States Cellular's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.8% today to 3.9% in 3 years time.
• Analysts expect earnings to reach $152.7 million (and earnings per share of $1.74) by about November 2027, up from $-30.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 50.1x on those 2027 earnings, up from -177.5x today. This future PE is greater than the current PE for the US Wireless Telecom industry at 10.1x.
• 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 terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

United States Cellular Future Earnings Per Share Growth

Risks

• The pending transactions with T-Mobile and sale of spectrum may not proceed as planned due to regulatory approvals, potentially impacting the anticipated cash proceeds and future earnings.
  
• The impairment charge on millimeter wave licenses highlights challenges with spectrum utilization, possibly affecting the company's net margins and asset value.
  
• A decline in service revenues driven by subscriber base reductions indicates potential revenue growth challenges going forward.
  
• Reduced capital expenditures in response to industry-wide moderation in wireless capital spending may limit future network enhancements, affecting competitive positioning and long-term revenue opportunities.
  
• High cash taxes anticipated from proposed transactions may reduce post-sale cash proceeds, impacting free cash flow and earnings.

Valuation

• The analysts have a consensus price target of $74.0 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 $86.0, 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 $152.7 million, and it would be trading on a PE ratio of 50.1x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $61.94, the analyst's price target of $74.0 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.