U.S. Cellular’s 22.9% return over the past six months has outpaced the S&P 500 by 17.5%, and its stock price has climbed to $78.30 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in U.S. Cellular, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think U.S. Cellular Will Underperform?
We’re glad investors have benefited from the price increase, but we don't have much confidence in U.S. Cellular. Here are three reasons why you should be careful with USM and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. U.S. Cellular’s demand was weak over the last five years as its sales fell at a 1.6% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.
Analyzing the trend in its profitability, U.S. Cellular’s adjusted operating margin decreased by 5.6 percentage points over the last five years. U.S. Cellular’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its adjusted operating margin for the trailing 12 months was breakeven.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for U.S. Cellular, its EPS declined by 18% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
We see the value of companies helping their customers, but in the case of U.S. Cellular, we’re out. With its shares outperforming the market lately, the stock trades at 6.6× forward EV-to-EBITDA (or $78.30 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward the Amazon and PayPal of Latin America.
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