Shares of MetroPCS Communications (NYSE: PCS) hit a 52-week low on Friday. Let's take a look at how it got there and whether cloudy skies remain in the forecast.

How it got there
MetroPCS, operator of the fifth-largest mobile network in the United States, is figuring out that life as a second-tier telecommunications company isn't as easy as it once thought. In its latest quarterly report, MetroPCS noted that wireless subscriber additions amounted to only 131,654 -- its lowest first-quarter total in years, despite a 60-basis-point drop in customer attrition rates. For MetroPCS shareholders, there are two main reasons for the weakness.

First, the company is having a very hard time in getting subscribers to upgrade to smartphones. Based on its latest quarterly report, only 6% of all subscribers are using its 4G LTE network. The company has had to take huge margin hits in the form of $30 mail-in rebates just to entice consumers to purchase smartphones. Even worse, the company's cost per gross addition ballooned to $235 in the latest quarter from $157 a year earlier, while average revenue per user -- an extremely important metric for wireless companies that helps determine margin growth -- ticked higher by a measly $0.14.

Second, it simply can't compete in a world of larger telecom companies. AT&T (NYSE: T) and Verizon (NYSE: VZ) have more spectrum and considerably larger budgets that just don't allow any room for a second-tier player like MetroPCS to steal market share. At one time, when cheap phones were all the rage, MetroPCS had a shot, but with the price of smartphones dropping dramatically as market saturation has spiked, MetroPCS' advantage went down the tubes.

Things are so bad that even a potential deal with Sprint Nextel (NYSE: S), orchestrated by its CEO, Dan Hesse, was axed by the struggling Sprint's board of directors.

How it stacks up
Let's see how MetroPCS Communications stacks up to its peers.

PCS Chart

PCS data by YCharts.

As you can see, the past five years haven't been kind to wireless providers, but they've been especially harsh on MetroPCS and Sprint.



Price/Cash Flow

Forward P/E

Dividend Yield

MetroPCS Communications 0.8 2.3 7.6 0%
AT&T 1.8 5.6 12.8 5.3%
Verizon 3.1 3.7 14.4 4.9%
Sprint Nextel 0.6 1.9 N/M 0%

Source: Morningstar. Yields are projected. N/M = not meaningful.

The wireless sector in the U.S. has really become a two-horse race between AT&T and Verizon, which has pushed the other wireless providers to the brink. Over the past five years, not only has Sprint Nextel lost money every year, but its gross margin has worsened in each successive year. Perhaps the iPhone will help its ailing network, but only time will tell if that's the case. MetroPCS might appear cheap relative to the larger AT&T and Verizon, but at just a fraction of their size and with so few of its subscribers using smartphones, it's going to continue to bleed market share as it attempts to play catch-up.

What's next
Now for the real question: What's next for MetroPCS Communications? The answer really depends on whether MetroPCS can successfully coerce its customers to upgrade to smartphones at minimal costs, and if it can somehow gain a competitive edge on its peers. "How can it gain this advantage?" you may ask. Spectrum-rich Clearwire (Nasdaq: CLWR) is in need of cash to finance its 4G LTE build-out, so perhaps there's a deal to be had there?

Our very own CAPS community gives the company a four-star rating (out of five), with 92.4% of members expecting it to outperform. In true contrarian fashion, I've made a CAPScall of underperform on MetroPCS and am currently up 33 points on that call. I'm also not looking to close this pick anytime soon.

The reason I feel more pain is ahead relates to its lateness to the smartphone party. MetroPCS simply doesn't have the luxury of falling even further behind AT&T and Verizon in the wireless space. Worst of all, its costs associated with acquiring new customers continues to trend higher. MetroPCS is to the wireless market what Nokia is to the handset market: yesterday's news!

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