breakingviews / Financial Insight: MetroPCS Could Connect; Profitability Is the Reason This Telecom May Succeed In Market Debut This Week
Telecom bankers have a lot to answer for. In the past year, the industry's two big U.S. initial public offerings of stock have been disastrous. The shares of Vonage Holdings and Clearwire have plummeted 80% and 25%, respectively, since their debuts.</br></br>Now, bankers are shopping the largest telecom IPO since 2004. Luckily for them -- and prospective investors -- the $1 billion float of discount cellphone operator MetroPCS looks like a winner.</br></br>Metro is a pygmy competing against giants, but that isn't necessarily bad. Competition among the big cellphone operators is relatively restrained. It tends to revolve around which flashy new handset is offered along with a standard multiyear contract. In contrast, Metro sells cheap, unlimited cellphone service to customers on a monthly basis for a flat fee.</br></br>This has worked out well. Metro's revenues have increased about 60% in each of the past five years. But growth rates aren't everything, as Vonage and Clearwire have demonstrated. Profitability is the key. And it remains only a vague promise for those two companies. Metro, by contrast, has turned a profit for the past four years -- and its earnings have paid for a majority of its growth.</br></br>Moreover, the price it's seeking looks reasonable. At $20, the midpoint of the indicated range, the stock will be valued at less than 16 times estimated 2007 EBITDA (earnings before taxes, depreciation and other factors). This is slightly more than Leap Wireless, a similar business. But Metro is likely to grow faster because its licenses cover a greater proportion of the population.