June 21, 2012 by: Erik Gholtoghian | about: PCS, includes: S, T, VZ Fundamentally, MetroPCS (PCS) is not
the company its stock price would suggest. This may be due to a number of factors, but one of which seems to
be ignorance.
Markets are nearly efficient, but in some instances a brand image can overly influence investors' opinion of
a stock. Because MetroPCS has been cast by many cell phone users as an inferior network, many investors
automatically assume the stock itself is also of inferior quality. At this time, neither of those
assumptions is correct.
Several years back, MetroPCS did have a fairly low quality network with snail speed Internet. Calls would
occasionally drop. Callers would frequently not hear each other properly, especially deep inside of large
buildings. But even then, the network got the job done and for the correct price, all the while making the
company profit. Since then, call quality on the network has risen dramatically and Internet speed is
sufficient for even every day users. Dropped calls are rather rare, and voice quality on the newest 4G LTE
phones is nearly indistinguishable from carriers like Verizon (VZ), AT&T (T), or Sprint (S).
In the future, a network upgrade to VOLTE/VOIP will allow MetroPCS to offer even higher quality voice
services to its users, possibly called HD Voice, and at the same time allow a more efficient use of network
resources and spectrum.
All of this excellent financial and technological management has resulted in MetroPCS sitting on nearly $2
billion in cash. Because that cash is likely invested and earning less than 1% per year, and shares are
trading at a large discount, there is an argument that it could be time to finally buy back shares. Common
stock has a built in cost, and in this case that cost is in the neighborhood of 6-7% per year. Meaning, the
cost of equity is higher than the return on cash.
With such a massive war chest and stable business, I believe MetroPCS ought to show the market which company
actually can afford to buy MetroPCS out. And that company is none other than MetroPCS itself.
A share buyback would put some of the cash to work and improve company valuation. Profit and equity per
share would rise and liabilities per share would fall.
By offering to buy shares at $6.50 per share, using only $400 million of the nearly $2 billion in cash,
MetroPCS could buy back 61 million shares, literally 17% of all shares outstanding, and still have more than
enough money left to fight off the increasing competition and recent slowdown in profit.
The future is bright for MetroPCS because other options for that cash exist too. A dividend, a large network
expansion, or a buyout of a smaller company could all be announced. But in the end, a medium sized share
buyback seems to reward investors sufficiently while continuing the company's high rate of growth.
For comparative purposes, the chart below shows that Verizon, Sprint, and AT&T have roughly $6 billion, $7
billion, and $2.5 billion in cash, respectively. This means that MetroPCS has nearly as much cash as AT&T, a
company which is valued 95 times higher than MetroPCS.
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