We are maintaining our long-term Neutral rating on MetroPCS Communications Inc. (PCS), the sixth-largest prepaid wireless service operator in the U.S. While the expansion of services and products may drive the company’s future growth, we believe that associated expenditures will strain the balance sheet.
MetroPCSexpects to benefit from its low cost structure, successful “Wireless for All” service plans, smartphone offerings and the deployment of 4G LTE network in some regions.In addition, the company’s expansion into the lucrative Northeastern market appears encouraging for future business growth.
Over the past five years, the company generated impressive results with subscriber growth and adjusted EBITDA at 29% and 31%, respectively. In the fourth quarter of 2010, the company’s earnings surpassed the Zacks Consensus Estimate as well as the year-ago earnings. Subscriber additions were strong with the continued acceptance of “Wireless for All” plans that led to lower churn.
MetroPCS is also making efforts to strengthen its balance sheet through extending and consolidating its debt maturity profile. The company exited fiscal 2010 with cash and cash equivalents of $796.5 million compared with $929.4 million at the end of 2009. However, the company’s balance sheet contains high debt. Long-term debt increased to $3.8 billion at the end of 2010 from the prior-year level of $3.6 billion.
We remain concerned about the company’s highly leveraged balance sheet, which may limit its ability to invest in growth initiatives going forward. Additionally, higher promotional expenses for rolling out new service plans and smartphones offerings will also dilute margins going forward.
Although MetroPCS is strongly positioned than its bigger rival AT&T Inc. (T), it faces stiff competition from its archrival Leap Wireless (LEAP). Further, MetroPCS’ relatively backdated CDMA network platform does not support smartphone offerings, which could result in customer loss.
Our long-term rating is supported by the Zacks # 3 (Hold) Rank.
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