Thursday, October 18, 2012

Leap Wireless: Watch Out Below

Update: Leap Wireless crushed after Metro PCS (PCS) Q2 2011 Results are Released

Not only do the results bode ill for the earnings prospects of LEAP but the release removes MetroPCS from the pool of potential acquirers. Clearly, any prospect of LEAP being acquired for a meaningful premium is over.

See the full Metro PCS earnings call transcript

Technically there is no support. Based on the volume traded there is still significant short interest in the stock. When the stock was last down near this level at the end of Aug. 2010, the short interest was 9.2 million shares. Look for momentum shorts to pile on and discouraged longs to liquidate. While the wireless spectrum licenses are valuable assets, don't look to book value to provide any meaningful support.

Continued losses will diminish shareholder value. Shareholders are confronted with the classic agency problem. Management will continue to operate the company at a loss, protecting their jobs while diminishing shareholder value. At the current rate of loss, book value will nearly halve in a year. Unless earnings reverse their recent trend and with merger prospects dead, I think that the strategic alternatives for the company are limited.

I think that it is highly unlikely that LEAP will be able to improve margins. The biggest competitive threat is Sprint's (S) continued move toward low-end pricing tiers. I predict that LEAP's share price will be significantly lower in a year. For investors who are uncomfortable shorting stocks, an interesting way to position for a decline is to buy the LEAP Jan 2013 10 Puts Bid $2.61 x Ask $2.81.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

No comments:

Post a Comment