Seasonal impact more pronounced, but growth remains unmatched - Goldman Sachs - August 08, 2007
What's changed
Most metrics in 2Q were below our expectations, including lower net adds (127k vs. 160k est), higher churn (4.3% vs. our 4.0% est), and slightly lower ARPU ($45.13 vs. $46.19). In addition, 3Q guidance included lower net additions and higher churn. However, 2Q adjusted OIBDA matched our estimate, and 2008 OIBDA guidance of $550-$650 is above our prior forecasts. Our price target moves to $86 from $88 as the roll forward of our PT to 2008 (+$7) is more than offset by seasonal volatility that we believe adds an added degree of risk to the operating forecasts (-$9).
Implications
Stock should be pressured - risk profile raised. We see increased risk to forecasts given the volatility of quarterly metrics. We believe seasonal swings could get worse before they get better, as large rollouts in 2008 have magnified effects on churn, additions, ARPU, and expenses. However, the growth characteristics and the margin expansion opportunity continues to outpace peers. Full speed ahead on Auction 66 launches means the company's accelerated growth profile relative to the rest of wireless continues for the foreseeable future. Hence, stepping back, while the seasonality gets worse, the growth trajectory when viewed from a total year perspective remains incredibly robust, with over 35% service revenue growth forecast in 2008.
Valuation
Our 18-month $86 price target (from $88) sums:
(1) 2008YE DCF of ~$72 for the existing business;
(2) ~$12/share option value for AWS spectrum market launches not in our model but included in Leap's launch plans;
(3) ~$2/share value for licenses owned but not likely to be built out.
Key risks
(1) Rising competition in the unlimited market;
(2) customers impacted by macro risks such as unemployment, subprime fears, and gas prices. |
