Friday, Credit Suisse initiated coverage of MetroPCS Communications Inc. (PCS) stock with an Underperform rating and a price target of $4.
Analyst Chaplin initiated the stock at Underperform, based on his view that ARPU and margin declines will wipe out much of the company's equity value by the end of our forecast period. The analyst's 12-month price target of $4 is based on his discounted cash flow based valuation of $2, which incorporates the value of non-operating assets, plus a synergy value in the event of a deal of $2 / share.
The analyst expects increasing competition across the prepaid market to result in declining ARPU and rising churn and CPGA for PCS. This drives substantial margin pressure longer-term, resulting in declining EBITDA and FCF towards the end of our forecast period. The margin pressure wipes out much of PCS's intrinsic value.
The analyst expects a number of pricing announcements from competing carriers over the course of the next few months, which he believes will result in long-term expectations for ARPU to come down. In addition, the analyst expects churn and CPGA to rise for carriers in general over the next few quarters, which should lead to lower expectations for long-term margins.
Currently, PCS is down $0.36 or 5.06% and trading at $6.76.
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