Flat Rates Point Up For MetroPCS, LeapFlat Rates Point Up For MetroPCS, Leap
REINHARDT KRAUSE, Investor's Business Daily_Dec 24, 2008 09:48 EST
Wireless phone companies that sell low-cost, flat-rate unlimited calling plans may have an upside as the economy weakens. At least some investors seem to think so.
Shares in MetroPCS Communications PCS, the biggest U.S. provider of flat-rate services with 4.85 million customers, have climbed 39% since Nov. 21. Shares in Leap Wireless LEAP, the No. 2 flat-rate provider with 3.46 million subscribers, have jumped more than 80% in that time.
Both stocks are down for the year -- MetroPCS 24% and Leap 44% -- but why the late-year rebound?
As people cut expenses during the economic downturn, some wireless users may switch to the low-cost plans sold by MetroPCS and Leap, analysts say. They sell unlimited, no-frills wireless calling plans that start at $30 or $35. The big four national carriers -- AT&T T , Verizon Wireless, Sprint Nextel S and T-Mobile USA -- sell unlimited plans for around $100, but their plans have frills such as no roaming charges, better coverage, texting and data.
Like Wal-Mart, McDonald's
"Investors are seeing the Leap-PCS model as more resilient in a recession, similar to what we have seen at Wal-Mart and McDonald's," said John Hodulik, a UBS analyst. "I also think cheaper gas means more money in people's pockets in the segment of the market that both companies focus on."
MetroPCS and Leap generally service households with incomes under $45,000.
MetroPCS and Leap lack national networks but have been expanding into more markets, helping subscriber growth. In the third quarter, MetroPCS added 249,000 net new subscribers, compared with a gain of 114,000 a year earlier. Leap garnered 155,000, up from 36,000.
The recession likely will speed a shift to wireless-only phone service as consumers dump traditional landline service to save money, analysts say. MetroPCS and Leap could capitalize. And more users may shift to cheaper plans.
"With the weakening economy, the trend toward wireless substitution will accelerate," said Kevin Roe, principal of Roe Equity Research. "The entire wireless industry has benefited for years from cutting the cord, but Leap and MetroPCS may be greater beneficiaries in a weakening economy. To some extent, a weakening economy is their friend."
The slowing economy, though, has negatives for all wireless companies. Customer disconnects are expected to increase as unemployment rises.
MetroPCS and Leap aren't the only wireless firms that may benefit as consumers cut costs. Consumers have other options, including buying cell phone minutes as they need them using prepaid services.
While the nation's big four wireless carriers all sell prepaid services, they haven't yet rolled out rate plans to compete head-on with MetroPCS and Leap.
In early 2008, all four rolled out flat-rate, unlimited calling plans for about $100 a month, setting off a general sell-off of wireless stocks as investors feared a price war. That hasn't happened, but some observers say struggling Sprint could slash flat-rate pricing to $80 or less in a bid to revive customer growth.
No Signed Contracts
Unlike the big four, MetroPCS and Leap don't perform credit checks or require that subscribers sign contracts. Customers must pay each month in advance. MetroPCS and Leap charge roaming fees, so their plans may not be attractive to users who travel often.
Subscriber growth for MetroPCS and Leap has been tied to their expansion into new markets. In 2006, both acquired new radio spectrum in government airwave auctions.
In 2009, MetroPCS plans to launch services in New York and Boston, says Jonathan Atkin, an analyst at RBC Capital markets. Leap plans to expand in Chicago and Philadelphia.
Roe says MetroPCS and Leap should merge to form a national, flat-rate company that would be more competitive with the big four. The lack of a merger "has been a big disappointment to investors," he said.
In 2007, MetroPCS attempted to acquire Leap but was rebuffed. In September of this year, the two companies signed a roaming deal enabling them to offer quasi-national rate plans. They also settled litigation between them.
The roaming deal shows that relations between the two have warmed, but Leap's asking price apparently remains too high for a deal to happen, analysts say.
In a recent research note, Goldman Sachs analyst Jason Armstrong said a near-term deal seemed unlikely because of the credit crisis and financing obstacles.
Armstrong expects MetroPCS to reveal strong fourth-quarter subscriber additions. He forecasts MetroPCS adding 556,000 subscribers this quarter, 86% more than it added in 2007's fourth quarter.
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