FLAT-RATE WIRELESS carriers serving the sub-prime sector have seen their stocks plunge in recent weeks, reflecting fears about sub-prime customers who could affect the carriers’ financial results.
The financial markets have been rattled by fears about the extent to which the floundering sub-prime mortgage market and a corporate credit crunch will affect the rest of the economy.
Amidst the turbulence on Wall Street, the Federal Reserve opted to cut the interest rate that it charges to banks in order to stave off a credit crisis, and the market rebounded. News late last week that troubled mortgage company Countrywide was receiving a $2 billion credit infusion from Bank of America also helped to calm fears. However, companies in other industries have cited the subprime mortgage situation as trickling into their business, to some extent. Several mortgage companies also announced massive layoffs; Reuters reported that the mortgage-related job losses as of late last week stood at 12,600.
MetroPCS Communications Inc.’s stock, which went public in April, peaked at around $40 in late July, but fell to around $30 in early August after the carrier posted disappointing customer numbers. MetroPCS’ stock has since slipped into the $25-per-share range, but as of last Friday was hovering closer to $28 per share.
Competitive sympathy, pressure
Analyst Kevin Roe of Roe Equity Research noted that Leap Wireless International Inc.’s stock “was going down in sympathy with Metro” and the companies were further impacted when Sprint Nextel Corp. reported that a healthy 100,000 users had signed up for its new unlimited flat-rate Boost Mobile service.
“The competition for this segment has gone up pretty dramatically,” Roe said.
Earlier this year Leap’s stock had been steadily gaining value, and was trading as high as $99 per share in late July. Earlier this month, though, the carrier’s stock took a plunge into the $60 range after Leap announced second-quarter customer results that did not meet Wall Street’s expectations and weaker third quarter guidance. However, the stock rebounded slightly to above $63 after a Credit Suisse report that the company is now undervalued.
“Part of it is the whole subprime mess,” said Current Analysis analyst William Ho. “Leap’s customers and Metro’s customers are that category, the sub-prime category, and all those fears kind of rode the waves of the stocks’ decline.”
Ho also said that the Boost Unlimited offer may be gobbling market share.
Retail slide
Some of the companies that have cited the sub-prime mortgage problem as affecting their businesses include mega retailer Wal-Mart-one of the largest purveyors of wireless phones. Wal-Mart lowered its earnings forecast for the full year in part due to “macro economic pressure” in markets including the U.S. and noted in its quarterly call that it was seeing slower growth in discretionary spending areas of its business such as clothing and electronics. Home Depot, which is more directly affected by issues in the housing market, specifically cited the subprime market as a contributing factor to a challenging market and lower sales.
However, Doug Hutcheson, president and CEO of Leap, told investors in the company’s most recent quarterly call that the company is “comfortably absorbing” impacts from both the sub-prime turmoil and gas prices and that Leap hadn’t seen any “meaningful impact.”
“We believe the business has to date absorbed the effects associated with financial pressure on subprime borrowers and rising gas prices. However,” Hutcheson added, “We do not discount the potential future impact of these factors and continue to monitor macroeconomic trends as we have an economically sensitive customer base. . At this point, we . don’t see the large macro environment affecting us.”
Hutcheson added that in this year’s third quarter, Leap will not have last year’s advantage of a large number of new market launches to boost subscriber gains, and that the “less-tenured” customers who have been added in Leap’s new markets will probably drive up its churn figure.
