Shares of MetroPCS Communications Inc. and Leap Wireless International Inc. _ wireless carriers that offer low-cost, prepaid service _ got a boost Tuesday after a Bernstein Research analyst started coverage of both with "outperform" ratings.
Analyst Craig Moffett said competition in the prepaid wireless market is intense, and only getting more so.
"With few areas of compelling growth left in the wireless market, carriers have chased prices downward in a race to the bottom," he wrote in a note to investors. "With a surfeit of competitors, the market is structurally unstable."
As such, it's not surprising that expectations for both Leap and MetroPCS are low. But, he says, they are now too low. Quarter-to-date, shares of MetroPCS are down nearly 21 percent, while Leap is down about 14 percent. Shares of other telecommunications companies, such as AT&T and Verizon Communications, are up (about 2.5 percent and 9 percent, respectively).
"By limiting their respective networks to densely populated urban areas, and by targeting lower income ethnic populations, Leap and Metro have streamlined their cost structures to achieve profitability comparable to that of the major wireless carriers even a much lower prices," Moffett said.
He says both companies are in a position to withstand price declines, but their competitors, such as Sprint Nextel Corp. and T-Mobile, are not.
Moffett established a target price of $23 for Leap and $10 for MetroPCS.
Shares of Leap rose $1.46, or 9.5 percent, to close Tuesday at $16.85. MetroPCS rose 48 cents, or 7 percent, to $7.35.