MetroPCS Communications: Good Call
How would you like a cell phone plan that gives you unlimited local minutes for a flat $30 a month -- no charges for exceeding your monthly limit and no contract locking you in for years? How would you like one that gives you unlimited local calling, unlimited long distance plus unlimited text and picture messaging as well as Internet access for a flat $50 a month? If they sound like good deals, then you might want to consider stock in the company offering them: MetroPCS Communications, a Dallas-based wireless provider whose prospects are anything but flat.
The company, which only went public in April at $23 a share, garnered buy recommendations from several brokerage houses on May 29. Bear Sterns (which led the underwriting for the initial public offering), Bank of America, Thomas Weisel, UBS Securities and Wachovia all published bullish remarks, following a similar recommendation on May 23 from Robert W. Baird & Co. Surprisingly, the stock (symbol PCS) lost 3.2% on the day, closing at $33.90.
With 3.4 million customers, Metro is the seventh-largest wireless carrier. More importantly, it is the fastest-growing provider in an industry in which growth is getting harder to come by. Metro's success comes from offering simple, all-you-can-call bargain plans to a relatively untapped customer base, consisting of the young, the ethnically diverse and the credit-challenged.
Metro focuses on dense urban markets. It currently operates in Miami, Tampa, Orlando, Atlanta, San Francisco, Sacramento, Detroit and Dallas-Fort Worth. Expansion to Los Angeles is imminent. Las Vegas, New York City, Boston and Philadelphia are expected in 2008. Between new launches and deeper penetration of existing markets, Metro could count 9.8 million customers by the end of 2010, according to Bear Sterns. The average customer uses 2,000 minutes per month; 80% of them use MetroPCS as their primary phone, and over half have eliminated their landline altogether.
True, Metro's customers come and go at a faster rate than the industry's average -- but that's more than made up for by an industry-low cost of adding new subscribers. Metro pays $100 on average, vs. an industry average of $350 to $400. That's because most companies spend a fortune on commissions, marketing and subsidizing the cost of customers' phones. Metro pays commissions, too, but relies more on word-of-mouth marketing. And rather than discounting new handsets, Metro often marks them up. You'll pay just $50 for a Motorola RAZR after discounts with Verizon, for instance, but shell out $224 for the same phone with Metro.
Forecasts for the company's growth rates are accordingly healthy. Baird & Co. analyst William Power sees revenues growing at a compound annual rate of 35% through the five-year period ending 2011; earnings before accounting for interest, taxes, depreciation and amortization (a version of cash flow) could log a compound annual growth rate of 44%. The stock trades at 24 times the $1.41 a share that Bear Stearns expects Metro to earn in 2009. Bear Sterns believes the stock deserves to trade at 29 times earnings, given the company's stellar growth prospects. That would equate to a stock a price of $41 over the next year -- a conservative estimate compared with a $45 price target from Baird & Co. and Bank of America's $46.
Not everyone is as sold on the shares. Analysts at Morgan Stanley and Raymond James gave the stock middling ratings, equivalent to "hold." The stock is up nearly 48% since its IPO, after all. And Metro's not unique. It competes with Leap Wireless, with 2.5 million customers, and with Sprint's much smaller Boost subsidiary, which operates in California and Texas.
Increasingly, the big, national carriers whose markets are reaching peak penetration will also encroach on Metro's "sub-prime" customers. Market launches could pressure profits in the short-term, and depending on less-well-heeled customers for your bread-and-butter is risky -- just ask any mortgage broker.
But if your taste runs to the faster-growing selections on Wall Street and you can stomach the risk, go ahead and call your broker. And if you're calling from a MetroPCS phone, don't worry about the minutes.