We initiate TDS at Hold with a $-28 price target. Telephone and Data Systems, Inc. provides wireless and wireline communications services in the United States through its UScellular and TDS Telecom segments.
The problem is pretty well understood: a transformational transaction leaves TDS with a glaring revenue reset as UScellular’s wireless operations deconsolidate (75% of consolidated revenue), the street estimate that we feel is still dramatically underestimating to the tune of our FY25E/FY26E revenue being just $3bn/$1.45bn vs. consensus above $4.6bn.
The street misses the mark, in our view, by failing to price in the extent and timing of the revenue cliff (most models simply adjust the top line down by 5-6%), a flawed assumption that is likely to be undermined by pro-forma financials in the quarters ahead.
With wireless gone, the stock must rebase its valuation: we set our price target at a 1.1x forward EV/Sales multiple (in line with historical median), given a new, smaller scale and more steady-state telecom/tower growth; the street’s 1.79x is now disconnected from the post-deal reality, overvaluing the shrunken top line.
The risk: while the deal provides cash to the balance sheet, the narrower operating base and lack of revenue growth provide limited catalyst.
Bottom line: we see R/R as balanced and recommend investors wait on the sidelines until the sell-side fully re-calibrates to the post-wireless reality.
Sizing the Cliff: The Fundamental Reset of TDS Investors
The tower business stands as a critical stabilizing asset for TDS following the transformative wireless divestiture—and investors should, appropriately, focus on its underlying characteristics.