Danger Zone: United States Cellular (USM)

U.S. Cellular Corp. (USM: $40/share), the fifth largest wireless carrier in the United States, has landed in the Danger Zone this week. The company’s profits, margins, and return on invested capital (ROIC) are all in decline, and its revenues have been stagnant for a number of years. In addition, reported earnings per share conceal the company’s growing profit losses. At around $40/share, USM is significantly overvalued — enough so to make our Most Dangerous Stocks list since April.

All Signs of a Business in Decline

U.S Cellular’s profitability has been in decline for some time now, and its decline was quickly accelerated by the financial crisis in 2008. USM’s profits (NOPAT) peaked at $402 million in 2008, and have since declined to -$86 million in 2013.

NOPAT margins have shrunk almost every year, from 12% in 2000 to -2% last year.

Figure 1: Profit and Margins Plummeting Since 2008

USM_NOPAT_ROIC

Sources:   New Constructs, LLC and company filings

The company’s return on invested capital (ROIC) has fallen accordingly: USM’s ROIC is now -1.3% after a steady decline from 7% in 2008.

Revenue growth has also largely stalled since 2008, and USM’s most recent numbers show that its revenue is now in sharp decline. The company’s 2013 operating revenue was down 12% compared to 2012, and 1Q14 revenue was down 14% year over year.

USM’s primary problem is its demonstrated inability to grow its subscribers and retain these customers.

USM has two wireless customer segments: prepaid and postpaid plans. Some growth in the company’s number of prepaid plans has masked the decline in the company’s postpaid plans over the past few years. Postpaid customers have been abandoning USM at a growing rate. All told, this increasing decline coupled with the company’s divestiture from several markets in 2013 has caused USM to shed a total of 22% of its subscribers since 2009.

Non-Operating Items Mask Growing Losses

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Disclosure: David Trainer and André Rouillard receive no compensation to write about any specific stock, sector, or theme.

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