U.S. Cellular Earnings: Another Tough Quarter, but Company Finally Open to Strategic Alternatives

U.S. Cellular’s USM business continued deteriorating in the second quarter, but the stock skyrocketed after the firm announced it was exploring strategic alternatives. We believe the firm’s assets have significant value that makes today’s stock move warranted. However, the willingness of the controlling shareholder to accept potential incoming bids, and other challenges, including regulatory and tax issues, make potential outcomes highly speculative. We are maintaining our $24 fair value estimate, which continues to value U.S. Cellular on a standalone basis. We believe the value of the firm if operated independently is lower than it is in the hands of other owners.

While the performance of small pockets of U.S. Cellular’s business is exciting, those businesses are much too small to drive the stock. The firm continues to struggle to attract wireless phone subscribers, particularly in the valuable postpaid category, and the firm reduced its full-year sales guidance on the back of this weakness. Total services revenue was down 3% year over year, with postpaid revenue down 1.4% despite benefiting from fixed wireless broadband strength and slight growth in average revenue per user, or ARPU, and prepaid revenue down 9%.

Management’s initiatives to retain subscribers have successfully brought down postpaid customer churn, but we don’t think U.S. Cellular can compete well with its massive competitors, who have too many resources to enhance networks and attract customers. Although monthly postpaid churn was down to about 1%, the lowest since 2021 when COVID-19 policies prohibited cutting delinquent customers, the firm still lost another 29,000 net postpaid phone customers. The firm attracted only 83,000 gross phone customers during the quarter, the weakest result in well over a decade. In a market segment that it had previously identified as an area of opportunity, the firm also lost 8,000 net prepaid phone customers and saw prepaid ARPU drop 4% year over year.