United States Cellular Q3 Earnings: 2 Very Different Paths

seekingalpha2024-11-02

US Cellular's Q3 earnings were disappointing with misses on both EPS and Revenue.If the sale to T-Mobile is approved, US Cellular shareholders are likely to see significant upside from the sale price,...

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I previously rated US Cellular a buy as the valuation from the T-Mobile (TMUS) deal represented 40 to 50% upside potential between the payment for assets sold and the value of the remaining assets that could still be monetized. Since then, US Cellular has risen 19%. US Cellular Price Trend (TrendSpider) This is a very challenging moment for shareholders as the deal with T-Mobile is proceeding but has not yet been approved under antitrust concerns. If the deal doesn't go forward, US Cellular is left with a struggling core business that can't keep up with the market. Using DCF analysis I value this business at a price target of $27. If the deal does go through, shareholders are looking at significant upside between T-Mobile's consideration, further spectrum sale, and remaining assets. Using cash value, I value this scenario at a price target of $72. With such a wide range, I lower my rating from buy to hold until we have more clarity on which way this will swing. Earnings Recap US Cellular's earnings were disappointing with EPS of $0.44 missing by $0.83 and revenue of $922 million missing by $19 million. Earnings Summary (Seeking Alpha) While revenue was down 4% across both service and equipment, costs were mitigated lifting profitability slightly. This in my opinion looks like management has checked out awaiting sale. Managing costs and taking the foot off the gas on revenue is classic pre-M&A. Q3 Financial Summary (USM Investor Relations) Interestingly, management actually took AOIBDA and AEBITDA up given the cost trend in the business, again setting the business up for a sale to T-Mobile. 2024 Guidance (US Cellular Investor Relations) If the deal for T-Mobile goes through, then this is good news as T-Mobile will be one step ahead on an improved cost base. If the deal doesn't go through, US Cellular is left with an underinvested business and stagnant to declining revenue.  Valuation For valuation I have built out two scenarios. In the first scenario, I assume the deal goes through. I use Raymond James' estimate on the value of US Cellular's assets. This unlocks a $1 billion price premium from the T-Mobile deal, an additional $1.0 billion in cash consideration for Spectrum (this is contingent upon the T-Mobile sale), and $3.7 billion in assets remaining to be monetized. Assuming the sale goes through, cash value of the company is $6.2 billion after adjusting for debt, or $72 per share, 25% upside to today's prices.   Valuation On Sale To T-Mobile (Data: Raymond James; Analysis: Mike Dion) For the scenario where the deal doesn't go through, I ran a DCF analysis with the following assumptions:  US Cellular delivers mid point of guidance for 2024. Short-term and long-term growth in line with the market No-margin expansion or changes to operating cash Discount rate of 10% using estimated WACC plus risk premium  This analysis yields a price target of $27, 52% downside to today's prices. USM DCF Analysis (Data: Seeking Alpha; Analysis: Mike Dion) Wall Street is valuing the company as if the deal goes through with a price target of $67, closer to my high scenario. Wall Street Price Target (Seeking Alpha) Core Business Is Struggling US Cellular's core business is struggling. As shown above, service revenue was down 2%. This was largely driven by the postpaid wireless business which has lost subscribers 5 quarters in a row. Previously there was some lift from Fixed Wireless, but growth in that business has slowed down. ARPU was also only up 2% year-over-year, below the rate of inflation. US Cellular Wireless Postpaid (USM Investor Relations) This comes at a time when the market, and US Cellular's competitors are keeping up with the market or even growing beyond it. T-Mobile and AT&T (NYSE: T) are growing and Verizon (NYSE: VZ) is stagnant, although Verizon's wireless business growing. The overall market continues to grow at a rate above 3%. US Telecom CAGR (Mordor Intelligence) This is all fine if the T-Mobile sale goes through. If the deal does not go through, US Cellular is left with a business in need of a rapid turnaround, else it will be downside for shareholders. T-Mobile Sale Is Still Not Approved From the earnings call, management says the deal is still proceeding as expected. First, following our announcement back in May, the process to sell our Wireless operations and select spectrum to T-Mobile is proceeding as expected. As you may have seen, we filed our public interest statement with the FCC in September and we believe we’re on track for a mid-2025 closing. We remain confident that the transaction with T-Mobile is the best long-term solution for our customers as it gives them the long-term benefits of greater scale and a more competitive network. That said, the deal isn't done until all of the paperwork is signed. Both the FTC and the DOJ are challenging mergers at record levels, and a group of senators asked them to specifically review this transaction.   Antitrust Enforcement (Bloomberg) Looking at US Cellular and T-Mobile's overlap it would be hard not to expect at least some concessions on the deal if not a complete back. There are few areas that US Cellular does not overlap, and those areas are largely rural. US Cellular and T-Mobile Overlap (Steel In The Air) Until the deal is officially approved, this is a downside risk that shareholders need to consider. Verdict Regulatory approval of the US Cellular and T-Mobile deal presents a wide range of shareholder value, from $72 on the high end to $27 on the low end, with additional valuations possible in the event of concessions to close the deal. US Cellular's core business is struggling as the company sets up for sale, and it is not competing well with the big 3. In addition, antitrust enforcement is at an all time high. On the flip side, if the deal does go through, shareholders are looking at upside both from T-Mobile's premium and from additional spectrum sale that was recently announced.  Until there is more certainty around the sale, I lower my rating on USM from buy to hold.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.30.2","shortVersion":"4.30.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2480260628"}