We downgrade our recommendation for U.S. Cellular (USM), the wireless subsidiary of Telephone and Data Systems (TDS), to Underperform following the lower-than-expected fourth quarter 2009 results. The carrier reported disappointing results in the quarter with earnings coming in below the Zacks Consensus Estimate on account of lofty impairment charges.
 
U.S. Cellular remains challenged by the increasingly competitive domestic wireless market and intense pricing pressure which is affecting customer accretion. The company continues to be susceptible to aggressive pricing by its larger rivals. Most of the regional markets are extremely competitive, which has exacerbated following the consolidation among several larger rivals. Competition has intensified after the launch of exclusive premium wireless handsets by Tier-1 carriers.
 
Moreover, U.S. Cellular’s service revenue remain under pressure due to lower inbound roaming revenues resulting from Verizon‘s (VZ) acquisition of Alltel Wireless Corp in early 2009. The combined entity has significantly reduced the use of U.S. Cellular’s network for roaming. We feel that erosion in the company’s high-margin roaming revenue will persist in 2010.
 
U.S. Cellular also remains challenged by the low-cost service plans from competitors like Sprint Nextel’s (S) Boost Mobile unit, Leap Wireless (LEAP) and MetroPCS (PCS). These rival operators are aggressively rolling out cheaper flat-rate unlimited service plans ($50 per month or less).
 
In order to drive wireless growth, U.S. Cellular is expanding its 3G wireless broadband network (based on EV-DO technology) coverage. However, the aggressive network roll-out may strain finances moving forward should capital expenditures be required beyond management’s expectations. For 2010, US Cellular plans to spend $600 million in capital expenditures, up from $547 million in 2009.
Read the full analyst report on “USM”
Read the full analyst report on “TDS”
Read the full analyst report on “VZ”
Read the full analyst report on “S”
Read the full analyst report on “LEAP”
Read the full analyst report on “PCS”
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