Telephone & Data Systems Stock To Surpass Its Pre-Covid High

Telephone & Data Systems stock (NYSE: TDS) looks like a good opportunity at the present time. Telephone & Data Systems, Inc. is a service company providing wireless products and services; cable and wireline broadband, TV and voice services; and hosted and managed services to customers through its business units TDS Telecom, US Cellular, and OneNeck IT Solutions. TDS stock currently trades at $19 and is still down 25% so far this year. It traded around $25 in February 2020 just before the outbreak of the pandemic and is still almost 25% below that level as well. However, the stock has gained over 20% since its March lows of $16 compared to the S&P 500 which saw more than a 60% rise during this period. However, with lockdowns gradually being lifted and consumer demand expected to get back on track, coupled with acquisition benefits of Continuum and expansion of 5G technology, TDS stock is likely to rise more than 30% from here to surpass its pre-Covid high of $25. Our conclusion is based on a detailed comparison of TDS stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 63% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how TDS and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

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  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

TDS and S&P 500 Performance During 2007-08 Crisis

We see TDS stock declined from levels of around $63 in September 2007 (pre-crisis peak) to levels of around $27 in March 2009 (as the markets bottomed out), implying TDS stock lost 57% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $31 in early 2010, rising by 15% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

TDS Fundamentals Over Recent Years

TDS revenues remained stable around $5.2 billion between 2015 and 2019, while EPS declined from $2.02 to $1.06 due to higher share count and increased cost of services. However, despite the pandemic, revenue in the first nine months of 2020 remained almost stable on a y-o-y basis as the company benefited from the acquisition of Continuum, while better cost management led to higher earnings.

Does TDS Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

TDS’ total debt increased from $2.4 billion in 2016 to $3 billion in Q3 2020, while its total cash increased from around $0.9 billion to $1.1 billion over the same period. The company generated almost $1.2 billion in cash from its operations in the first nine months of 2020, more than it generated in full year 2019. This puts it in a reasonably comfortable position to deal with the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe Telephone and Data Systems stock has the potential for strong gains once fears surrounding the Covid outbreak are put to rest. Also, the recent acquisition and 5G technology expansion bodes well for TDS stock growth.

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