United States Cellular Corp (USM, Financial) recently saw a significant daily gain of 27.67%, with a three-month gain of 12.42%. Despite these impressive numbers, a deeper look into the company's financials, specifically its Earnings Per Share (EPS) of 0.67, raises the question: Is the stock significantly overvalued? This analysis aims to explore United States Cellular's valuation in depth, encouraging readers to consider whether the current stock price reflects the company's true market value.
Company Overview
United States Cellular is a regional wireless carrier serving approximately 4.5 million customers across significant parts of the United States, including the Midwest, mid-Atlantic, New England, and the Pacific Northwest. These areas have a combined population of around 32 million. Most of the markets the company serves are rural or belong to second/third-tier cities, with the exceptions of Milwaukee and Oklahoma City. Notably, United States Cellular also holds a 5.5% stake in Verizon Wireless' operations in Los Angeles and uniquely owns most of its towers, unlike its peers in the wireless carrier industry.
Comparing the current stock price of $45.95 to the GF Value of $28.85, which represents an estimation of fair value, suggests that United States Cellular might be significantly overvalued. This valuation discrepancy is crucial for potential investors to consider.
Understanding GF Value
The GF Value is a proprietary measure calculated to represent the intrinsic value of a stock. It is derived from historical trading multiples such as PE, PS, PB ratios, and Price-to-Free-Cash-Flow, adjusted by GuruFocus based on the company's past returns and growth, and incorporating estimates of future business performance. According to this model, if United States Cellular's stock price significantly exceeds the GF Value line, it is considered overvalued, suggesting a potentially lower future return.
At the current price of $45.95, our analysis indicates that United States Cellular is significantly overvalued, which may lead to disappointing future returns compared to the company's actual business growth.
Financial Strength and Risks
Investing in companies with weak financial strength can lead to permanent capital loss. Hence, it's crucial to assess metrics like the cash-to-debt ratio and interest coverage. United States Cellular's cash-to-debt ratio of 0.05 is lower than 86.46% of its industry peers, earning a poor financial strength rating of 4 out of 10 from GuruFocus.
Profitability and Growth Prospects
United States Cellular has maintained profitability in 9 out of the past 10 years, with recent revenues of $3.90 billion and an operating margin of 4.5%, which is lower than 64.64% of competitors in the telecommunication services industry. The company's growth has been sluggish, with a revenue decline of 1.1% annually, ranking below 71.04% of industry peers. This slow growth trajectory raises concerns about its potential to enhance shareholder value in the long term.
Moreover, comparing the Return on Invested Capital (ROIC) of 0.82 to the Weighted Average Cost of Capital (WACC) of 3.53 shows that the company is not generating adequate returns on its investments, which is a red flag for potential investors.
Conclusion
In conclusion, the current analysis suggests that United States Cellular (USM, Financial) is significantly overvalued. With poor financial strength, fair profitability, and below-average growth rates, potential investors should tread carefully. For those interested in exploring further, detailed financials for the past 30 years can be found here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
