Description
TDS is a wireless company that is not only poorly valued as an operating concern, but also trades at a discount to its stock portfolio.
First, they are outperforming their wireless industry. TDS has a 5 year average pretax margin of 15% that is triple the 5 year industry average and their current net margin is 12.5% vs. the industry average of -2.4%. TDS' debt to equity is half the industry's 1.26 and last year's ROA of 4.8% (double their own 5 year average) compares favorably with the industry average of -14.2%. None of this is expected to change for the worse.
Despite these superior results, TDS trades at levels significantly lower than its competitors. The industry averages 15x book value, TDS 2.5x. TDS currently is at 3x sales while the industry average is 10x. Conservatively, if TDS was trading at 10x book, they would be priced at $400/share. If 7x sales, TDS would be valued at $220/share. Both significantly above current levels.
Besides the low valuations given to TDS based just on operations, TDS is intrinsically undervalued. As of April 25, TDS was trading at a 12% discount to their stock portfolio of 70.79 million shares of USM (81% control), 78.18 million shares of AERL (which converts to 35.57 million shares of VSTR when VSTR consummates merger with AERL) and 2.7 million shares of VOD.
If the share holdings were disposed of, through the spin off of USM and sale of the VSTR and VOD holdings, the remaining operations, at 7x sales would be worth 62 dollars per share, without the cash from the disposition of VOD and the VSTR holdings.
If TDS were to dispose of their holdings today $157 would be a fair price: $62 dollars per share for the standalone company, $35 in cash (after tax) from a VSTR/VOD sale and $60 in USM stock from a spin off.
With institutional ownership at almost 70%, there are plenty of powerful and vocal shareholders who are pushing management for maximizing shareholder value, most likely for a spin off of the valuable stake in USM.
Catalyst
Recent FCC approval of the VSTR/AERL merger has brought attention to TDS' undervaluation compared to their stock holdings and the AT&T wireless IPO will have investors looking for cheap wireless alternatives, namely TDS.