(PCS) MetroPCS Communications in Neutral Lane

We believe MetroPCS Communications (PCS), one of the leading providers of unlimited prepaid wireless service in the U.S., remains well positioned to gain from the successful launch and execution of “Wireless for All” service plans. Further, growing demand for Android smartphones and the company’s entry into fourth-generation (4G) long-term evolution (LTE) wireless broadband services ensure opportunities for long term growth.

However, we remain concerned about the company’s highly leveraged balance sheet, which may limit its ability to invest in growth initiatives going forward. Moreover, higher promotional expenses to roll out new service plans, new smartphones offerings, a competitive market and regulatory issues keep us on the sidelines.

MetroPCS continues to benefit from the successful launch and execution of Wireless for All. During the first quarter, the company recorded subscriber net addition of more than 725,000, driven by the positive response to service plans under Wireless for All.

MetroPCS’ no-contract wireless services are also gaining popularity among subscribers, leading to significant market share. The company offers its services under attractive fixed-rate, unlimited usage-based price plans that do not require customers to enter into long-term contracts and keep minimum balance or deposits. This differentiates MetroPCS’ from the Tier-1 national wireless broadband carriers that typically require subscribers to sign up for long-term agreements (post-paid contracts). The company has maintained its market leadership on no-contract plans as is indicated by its encouraging subscriber growth of approximately 33% over the past five years.

MetroPCS remains focused on expanding its footprint in the 4G LTE market by joining the league of top-tier U.S. wireless carriers such as Verizon Communications (VZ) and AT&T (T) in deploying high-speed 4G LTE services, which are rapidly becoming the standard platform for communication across the globe. Encouraged by the success of Wireless for All, the company focuses on introducing “4G LTE for All” services in the future. The company also targets more spectrum acquisitions given the growing wireless market.

MetroPCS plans to launch “Android for All” in 2011 to drive a cellphone-to-smartphone transfer in the mass market. The company already launched its first no-contract Android smartphone “LG Optimus” in November 2010, followed by “The Huawei Ascend” in December and the world’s first 4G LTE Android handset “Samsung Galaxy Indulge” in early February 2011.

Additionally, it expects smartphone prices to decline in the near future, implying that customers will no longer have to depend on long-term contractual plans to reduce their upfront payments, thereby promoting its no contract service plans. Further, with more smartphone production being based on a single 4G LTE global standard, the company has ample opportunity to offer handsets at substantially low prices.

Further, we believe MetroPCS’ average cost per new customer addition and cost per user remain the lowest among the national wireless carriers, enabling it to maintain one of the highest profit per subscriber in the industry. Given the increased profitability, the company remains focused on expansion and expects capital expenditure of $900 million in 2011, $200 million up from its previous projection.

However, the carrier operates in an intensely competitive domestic low-cost prepaid wireless market. MetroPCS has been increasingly challenged by the aggressive rollout of competitive price plans by some of its larger rivals to capitalize on the attractive growth opportunity in the prepaid segment.

Further, the ongoing consolidation in the wireless industry through mergers, acquisitions and joint ventures is making competition stiff and severe. Additionally, the company is subject to Federal Communications Commission’s rules for availing spectrum licensing and any auction and licensing of new spectrum or regulatory changes in the existing spectrum licenses may significantly affect its network operation.

We are also concerned about the company’s significant balance sheet leverage, reflected by high leverage of 3.5 times and net leverage of 2.1 times. At the end of the first quarter, MetroPCS’ long-term debt was approximately $4.3 billion, reflecting significant interest burden.

Consequently, maintain our long-term Neutral recommendation on MetroPCS for the long term. The company also retains its Zacks #3 (Hold) Rank for the short term.

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