Danger Zone: United States Cellular (USM)

USM’s GAAP income does not reflect its startling decline in profitability. The company’s net income was up 26% to $140 million in 2013. However, as shown above, USM’s operating profit paints a much different picture — an $86 million loss in 2013.

The reason for this discrepancy between USM’s GAAP profit and its NOPAT lies in the non-operating items that the company recorded as operating income in 2013. Our patented research technology allows our analysts to quickly uncover these red flags in companies’ footnotes.

Most of this non-operating income is due to USM’s aforementioned divestiture from several east coast and Midwestern markets. USM was able to record $480 million from the sale of customers and spectrum licenses in these markets to Sprint (S). USM is boosting its earnings and masking a decline in profitability by essentially conceding a loss to its competition.

Weak Competitive Position

As the company’s exit from certain markets might indicate, USM has been lagging its competition. USM competes for customers with other United States mobile carriers, such as AT&T (T), Verizon (VZ), Sprint (S), and T-Mobile U.S. (TMUS).

Below is a breakdown of USM’s key profitability metrics vs. its competitors’. U.S. Cellular is behind only T, VZ, S, and TMUS in terms of number of subscribers. Despite this, it lags even the next-largest regional carriers, nTelos (NTLS) and Cincinnati Bell (CBB), in both ROIC and NOPAT margins (our model on S and TMUS requires more years of coverage to accurately assess NOPAT and ROIC):

Figure 2: Falling Short of the Competition

USM_competiton

Customer service complaints (especially nickel-and-diming) have been a sore spot for USM in addition to its poor mobile coverage outside of its home markets near its headquarters in Chicago. The company simply cannot compete on coverage and pricing with national wireless carriers, which have room in their profit margins for lower prices.Sources:   New Constructs, LLC and company filings

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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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