By Dan Gallagher
Shares of MetroPCS Communications Inc. and Leap Wireless
International Inc. made gains Tuesday after analysts said the
stocks have been oversold on fears of a potentially new price war
in the discount-wireless sector.
Both stocks had shed 20% of their value over the last couple of
weeks after rival Tracfone, a unit of America Movil SA (AMX),
launched a new service called "Straight Talk," which offers
unlimited calling and text messaging for $45 per month on a prepaid
basis. Investors had feared the move could spark a price war in the
prepaid-wireless market.
But a pair of analysts said Tuesday that those fears may be
overblown, and that the prepaid market has plenty of room for
growth.
The sentiment helped MetroPCS (PCS) gain nearly 5% by early
afternoon, while Leap (LEAP) was up nearly 4%. Virgin Mobile USA
Inc. (VM) shares were down nearly 2%.
"At the end of the first quarter, there were nearly 50 million
prepaid subscriptions in the U.S., but just 12 million of those -
less than a quarter - were on an unlimited plan from MetroPCS, Leap
or Sprint's Boost," John Hodulik of UBS wrote to clients. "As
unlimited prepaid service becomes more widely available, we expect
many traditional prepaid customers will switch, since the economics
of traditional prepaid are inferior to those of unlimited
prepaid."
Hodulik maintained his buy rating and $22 price target on
MetroPCS, which was trading up 60 cents at $12.37 Tuesday
afternoon. He said the company gets few of its customers through
Wal-Mart Stores Inc. (WMT), where Tracfone's Straight Talk service
will be sold.
Chandan Sarkar of Auriga USA upgraded Leap to a hold rating,
citing the stock's lower valuation following the sell-off. He noted
that Tracfone originally had experimented with a $30-per-month plan
before adopting the higher-priced model.
"While some view the new plan as adding more pricing pressure to
the U.S. wireless market, we view it as less severe than the
worst-case scenario that would have unfolded if the $30 plan had
been adopted widely," Sarkar wrote in a report. He said that Leap's
share price "captures much of the bad news to come in
wireless."
Leap shares were up $1.17 to $28.68 Tuesday afternoon. Sarkar
trimmed his price target to $27 from $29 based on the lower
valuation.
-Dan Gallagher; 415-439-6400; AskNewswires@dowjones.com