NTELOS Holdings Faces Competitive Pressures But Carries A Great Yield

After reading a lot about high-yield telecom plays like CenturyLink (CTL) and Windstream (WIN) recently started investigating the space to see if any of the firm's were worth investing in. I looked at a variety of different firms, but many had legacy businesses like wired phone lines segments that burden the company. One firm which stuck out though is NTELOS Holdings (NTLS).

NTLS, a regional provider of wireless communications in Virginia and West Virginia, is not burdened with the legacy businesses of some peers, it throws off an attractive pile of free cash flow, and has had pretty good revenue and EPS acceleration in recent quarters. (NTLS' wireline business was spun off as Lumos Networks (LMOS) back in 2011.) At the same time, after a big pullback in the stock from $21 to around $16.50 in the last two weeks, the stock now looks undervalued and sports an outstanding dividend yield of more than 10%.

While the stock's pullback is likely over-done, stocks like NTLS carry a dividend yield of this magnitude for a reason though; they are risky. In the case of NTLS, the company sports a sizeable debt load (LT debt to market cap of around 90%), and it's in a space dominated by giants. Further, as a regional player, NTLS is heavily dependent on Sprint as a critical roaming partner to give customers phone service outside the NTLS service area. While NTLS' long-term roaming agreement with Sprint lasts until July of 2015, there is some contract renewal risk embedded in the shares at this point.

On the other hand, unlike many regional telecoms, especially those with wireline businesses, NTLS is actually adding customers. For year ending Dec 31, 2013, NTLS added a net total of 25,000 customers (roughly evenly split between prepay and postpay), and saw an average churn of 2.9% (2.0% postpay and 4.7% prepay). Overall the company has about 465K retail subscribers. NTLS has also managed to begin getting more money from its customers, and this trend of rising Average Revenue per Unit (or ARPU) has continued in recent quarters. In November, NTLS reported ARPU increased to $54.29 from $50.93 buoyed by a $5.65 increase in postpay ARPU to $64.62. These figures are pretty good for a small wireless carrier dealing with a pretty poor macro economy.

Given this performance, I would not be all that surprised to see NTLS become an acquisition candidate as some point in the near future (adding to this likelihood, the company holds the license for all of the 1900 MHz PCS spectrum used in its network).

In addition to its wireless business, the other key component of NTLS' earnings that makes it an interesting investment is its wholesale business. NTLS provides digital PCS services on a wholesale basis to other PCS providers - mainly Sprint through its Strategic Network Alliance. In September, Sprint and NTLS reached a deal resolving a dispute the two firms had over the Strategic Network Alliance and NTLS' services. This was important first in that it suggested that the two companies can work together amicably to continue their long-term relationship, and second in that it solidified the NTLS PCS wholesale revenue stream from Sprint. This is important in that the wholesale revenue is a major driver for NTLS.

Wholesale revenues are trending upwards at a rate of roughly 15-20% per year on the back of increased data traffic in the Strategic Network Alliance, while equipment revenues are rising around 10% per year, and subscriber revenues are only rising 2-4% a year. While the firm as a whole has been seeing 7-8% revenue growth for 2012 thru 2013 (and this should continue in 2014, especially if the economy picks up steam), the Strategic Network Alliance is an important part of this. This growth has also helped boost margins with EBIT margins coming in at roughly 14% on average for that last two years, but accelerating somewhat in recent quarters. I would not be surprised to see EBIT margins hit 15% this year. Similarly, pre-tax profit margins have been increasing lately from 7.5% in 2012 to ~8% in 2013, and perhaps as much as 8.5% in 2014.

Revenue (Millions)	1Q	2Q	3Q	4Q	Year
2013	119.4	119.9	130.9	--	--
2012	110.5	111.6	114.5	117.4	454
2011	155.5	154.5	156.9	106.0	422.6
2010	137.6	132.3	134.3	141.5	545.7
2009	140.7	140.0	135.7	133.4	549.7
2008	132.3	131.0	136.0	140.6	539.8
EPS	1Q	2Q	3Q	4Q	Year
2013	0.25	0.43	0.48	E0.15	E1.31
2012	0.37	0.26	0.22	0.02	0.86
2011	0.52	0.60	0.63	0.20	1.02
2010	0.60	0.62	0.52	0.42	2.14
2009	0.82	0.82	0.68	0.68	3.00
2008	0.40	0.92	0.62	0.30	2.24

Thus overall, it is hard to overstate the importance of the Strategic Network Alliance for NTLS. While churn rates and net subscriber additions at the company are pretty good (or at least acceptable certainly), strong data revenue growth both from postpay customers and from the SNA promises to helping boost revenues for the next few quarters and probably years. Further with Sprint Nextel now having the backing of Softbank, it should be a much more effective competitor to AT&T and Verizon (and of course T-mobile). Overall this should help NTLS as any new customers in the region that Sprint picks up aid NTLS and its SNA data revenues.

Valuing NTLS is tough because it is unlikely to see any increase in its dividend, but while there is some risk for dividend (especially if the US went through another severe recession), the firm is throwing off enough cash to more than pay its debt interest and dividends. A sharp rate increase would of course hurt NTLS when it went to rollover its debt in a few years, but that kind of rate hike doesn't look likely anytime soon, and NTLS has been able to take advantage of low rates to improve its financial position. Further, with competition and consolidation in the wireless space heating up, NTLS could be an attractive target for some firms. The most obvious candidate is Sprint, but certainly other regional wireless providers could make a bid as well in an effort to boost their footprint and pick up NTLS' attractive wholesale SNA business. This acquisition possibility makes NTLS a more valuable company than the average regional telecom. Given this, the current dividend yield, and the big pullback in the stock on no obvious news (and a somewhat positive preannouncement in mid-January), NTLS could be interesting to income oriented investors at today's prices.

Source: NTELOS Holdings Faces Competitive Pressures But Carries A Great Yield

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NTLS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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