U.S. Cellular Earnings: Results Look Same as Usual While Stock Rides on Strategic Alternatives

U.S. Cellular’s USM third-quarter results were consistent with the past several quarters. The firm is making encouraging progress on some smaller lines of business, but those are not enough to move the needle relative to the core mobile phone business, which continues to struggle. We believe U.S. Cellular has valuable assets and is making an admirable effort, but it cannot compete with the national wireless carriers it’s up against. U.S. Cellular’s standalone value continues to deteriorate, in our view, as its customer base shrinks each quarter. The firm reiterated its exploration of strategic alternatives, and the stock remains elevated on those hopes. We think a sale of the firm would be in the best interest of shareholders, but the potential outcomes and valuation remain highly speculative. We’re maintaining our $24 fair value estimate, which is based on the firm’s current standalone value.

While the fate of a potential sale of the firm or assets is by far the most important factor for U.S. Cellular’s stock right now, management gave no details other than reiterating that its exploration of strategic alternatives remains active. In the past, reticence of the controlling family to sell the firm has been a major impediment. We suspect, given the active exploration, the family is now more open, but whether it will receive an offer that it feels reflects fair value is a big question. The firm can choose to sell noncore assets if it doesn’t think it has an attractive offer for the full company. Towers and financial partnerships--most notably the firm’s stake in Verizon’s Los Angeles operations--are likely candidates. However, U.S. Cellular has previously cited unfavorable tax consequences associated with selling those partnership stakes, and the tower portfolio is relatively small. Given the excitement reflected in the stock, we think either of those alternatives would be disappointing to the market from current levels.