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Editor's Note:
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begin the report this week, I'd like to invite everyone to
visit Unstrung.com, the
leader in wireless analysis and commentary. It's a site that no
savvy tech investor will want to be without. I've been
consulting for Unstrung and believe that we've put together
the sharpest monthly premium reports on the wireless industry
in the business. In fact, if you act
now, you can download a free trial report at Unstrung.com by
visiting: http://www.unstrung.com/premium/index.php3
Your
satisfaction is guaranteed so don't forget to check it out.
And if that's not enough to peak your interest, The New
York Times recently called Unstrung "a must read." So
take a look and then please let me know what you think.
Now on
with this week's RagasReport…
Wireless Carrier Stocks - Inside the Wireless
Balancing Act
Betting on
the wireless world right now is definitely not for the faint
of heart. Especially when it comes to investing in U.S. based
wireless carriers.
This
sector reminds me right now of "close your eyes and jump"
investing. In other words, it alll comes down to - become the
contrarian and - you just gotta believe.
On one
hand, the potential for much anticipated third
generation [3G] high speed wireless services make wireless
operators seem very appealing. After all, it potentially opens
up a whole new range of lucrative revenue streams for the
carriers.
Think
streaming video and audio, videoconferencing, advanced data
transfer, increased voice capacity and mobile commerce
opportunities galore on your 3G handsets.
On the
flipside is the argument that wireless operators are not only
taking on mountains of debt to expand their networks, but that
they are also falling into the trap of sacrificing long term
profits in the name of short term subscriber and revenue
growth.
Both sides
to this debate hold some validity. Much like we've already
seen in dot com land, even with strong subscriber growth still
ahead, consolidation among the group is likely.
The days
of local U.S. markets supporting eight to nine wireless
providers will eventually come to an end.
With this
in mind, I decided to take a look at the three largest
publicly traded U.S. wireless carriers. Thus, AT&T
Wireless Group, Sprint PCS and Nextel
Communications are under my analytical microscope for the
week.
Let's take
a closer look.
AT&T Wireless Group [AWE]
The days
of AT&T Wireless, the nation's third largest wireless
operator, trading as a tracking stock is quickly coming to a
close. By mid-summer the spin off of AWE from Ma Bell into a
truly independent publicly traded company should be complete.
This move should allow AWE greater financial and operational
flexibility, and perhaps most importantly, should help
distance the firm in investors' minds from the badly tarnished
image of scatterbrained AT&T [T].
For all of
the problems that Ma Bell has had lately, the Wireless Group
seems to have stayed largely above the turmoil. While AWE's
wireless network is tied to TDMA (time division multiple
access), a more expensive technology to upgrade to high-speed
data rates, Wireless did land an invaluable partner earlier
this year in NTT DoCoMo. The Japanese wireless giant
stepped to the plate back in January with $9.8 billion in cash
for a 16% stake in AT&T Wireless.
About a
month ago, AWE reported that first quarter sales rose 46% to
$3.2 billion, while EBITDA increased over 81% to $788 million.
AWE also added 588,000 subscribers during the quarter,
bringing its total customer base to 15.7 million. The only
blemish on AWE's results was that average monthly revenue per
customer dipped 7% to $62.60 during the quarter. Regardless,
with its independence finally on the horizon and an invaluable
wireless technology partner in DoCoMo, AWE shares look like a
good play at current levels.
Sprint PCS [PCS]
With
nearly 12 million subscribers, Sprint PCS is currently the
fourth largest wireless carrier in the U.S. A subsidiary of
long distance giant Sprint [FON], Sprint PCS has built
a highly sophisticated all-digital network based on CDMA (code
multiple access) technology. Through the marketing of its
"Wireless Web", PCS has arguably been the most aggressive of
the U.S. wireless carriers in the data arena. PCS has also
publicly announced a very aggressive schedule for rolling out
its 3G services.
While
Sprint PCS is pushing ahead full throttle on the technology
front, the company's financial results are not without their
share of speed bumps. While sales jumped 68% to $2.05 billion
during the most recent quarter, the firm's EPS loss of $.40
cents was three cents greater than Wall St. had expected. In
addition, the company reported EBITDA of $253 million for the
period, as it added over 800,000 new subscribers. Data usage
for Sprint PCS customers rose 30% in the quarter.
For the
year, Sprint PCS management expects EBITDA to hit $1.6 billion
and for the firm to add 4.1 million new subscribers. Analysts
currently expect PCS to report sales of $9.2 billion for the
year. While PCS has built out an impressive technology
infrastructure, I remain skeptical of the company's seemingly
"grow at any cost" marketing efforts. Even with PCS shares
currently trading near their 52-week low, I still believe that
there are better places to hunt in the wireless universe right
now.
Nextel Communications [NXTL]
As Sprint
PCS and AT&T Wireless battle largely for the highly
competitive consumer wireless market, Nextel Communications
remains focused primarily on serving business customers. As
the nation's fifth largest wireless operator with over 8
million subscribers, Nextel has built a cult-like following
for its two-way radio walkie-talkie like calling feature. Tech
billionaire Craig McCaw and his family own over 20% of
the firm. Motorola [MOT] is a 14% shareholder.
Much like
Sprint PCS and AT&T Wireless, Nextel is rapidly growing
its customer base, while trying to pare its sizeable losses.
Sales grew almost 50% to $1.74 billion for the most recent
quarter, as operating cash flow rose 39% to $318 million. Even
after lowering guidance and issuing an earnings warning,
Nextel's EPS loss of $.56 for the first quarter was five cents
greater than Wall St. analysts' estimates. The company added
695,400 new subscribers for the period.
On the
funding front, Nextel is well cashed up, having recently
raised $2.25 billion in debt financing. The company will need
its roughly $7 billion in liquidity to upgrade its network,
which is based on older proprietary technology from Motorola
called iDEN. On the plus side, Nextel's focus on the
enterprise has helped the company generate an industry leading
average of $71 monthly from its subscribers. While NXTL shares
are somewhat intriguing right now, AWE is my favorite of the
two.
p.s.
Want more investable insights and analysis into the wireless
universe?
Then
sign up now for a trial subscription to the Unstrung
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