MetroPCS Communications, Inc. (PCS) entered the year looking a bit vulnerable.  In an early January post on PCS, I recommended readers consider shorting the stock as the multiple was quite high and it appeared the company would likely face stiffer competition.

As it turns out, the stock is a bit lower than where it was trading in early January, but I am feeling less comfortable with a short position in this name.  Despite a market that is now down more than 20% on the year, PCS has traded in a wide, but relatively flat pattern.  This out-performance could eventually lead to a sharp move higher if the market begins to show more strength.

Last week the company announced earnings for the fourth quarter and the results were actually quite impressive.  Total revenues were $724 mil which is an increase of 22% over last year.  The company added another 520,000 subscribers during the quarter ending the year with 5.4 million subscribers.  More importantly, the company is successfully launching in new cities with Philadelphia and Las Vegas coming on board in late 2008, and New York City and Boston fresh out of the gate February 4th.

Management sounded very optimistic on industry trends as they noted “Voice continues to go wireless and wire-line replacement trends continue to accelerate.”  PCS was able to capitalize on this trend and lower their cost per gross addition to $119.82.  This is $21.60 lower than the fourth quarter of 2007 and shows that the company is now reaching a point where their overhead marketing expenses are efficiently reaching a broader audience.

Looking to 2009 the company expects to add another 1.4 to 1.7 million subscribers and report EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) of $900 mil to $1.1 billion.  The company will continue its aggressive spending on its technology rollout and expects Capital Expenditures in the $700 million to $900 million dollar range.  This is a bit surprising, given the economic climate, but may pay off if the bigger picture becomes more attractive.

One of my main concerns when I covered PCS in January, was that the competition could launch similar “unlimited” programs to PCS and take their competitive edge away.  To date, we have not seen any moves by Sprint (S), Verizon (VZ) or AT&T (T) to match the plan.  I believe this is a mistake by the big firms because they are now likely to begin losing market share to the likes of Leap Wireless (LEAP) and MetroPCS.  For this reason I’m still not recommending a long position in PCS.  The risk is just too great with the economy in such a difficult spot and with PCS trading at such a rich valuation.

But to avoid the risk of a rebounding market sending this stock sharply higher, I would recommend closing short positions in PCS for the time being.  The company has laid out an aggressive plan and to this point the plan has been executed flawlessly.

FD: Author does not have a position in PCS
PCS Notes
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