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StreetInsider.com's Rating Du Jour 11/30: FBR'S Brutal Downgrade of NTELOS (NTLS)

November 30, 2012 12:28 PM EST Send to a Friend
Get Alerts NTLS Hot Sheet
Price: $12.24 -0.49%

Rating Summary:
    2 Buy, 2 Hold, 1 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 21 | Down: 35 | New: 7
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StreetInsider.com's Rating Du Jour for November 30, 2012 is FBR's brutally-negative call on NTELOS Holdings (Nasdaq: NTLS).

FBR's David Dixon downgraded NTELOS from Market Perform to Underperform and slashed his price target 76 percent to $5, or 70 percent below Thursday's closing price of $16.17. The problem, according to Dixon is NTELOS' deal with Sprint.

NTELOS is a Sprint Strategic Network Alliance (SNA) partner until mid 2015 and
generates the majority of EBITDA from this agreement. The analyst doesn't expected the partnership to be renewed.

"We believe Sprint is planning to overbuild the wholesale region using the combination of 800 MHz and 2,600 MHz spectrum (where necessary), either leveraging the existing iDEN network (which is being decommissioned nationwide) or building new sites (at 800 MHz versus 1,900 MHz spacing)," Dixon explains. "We expect Sprint to confirm this with an announcement in FY13 ahead of the overbuild beginning in January 2014."

If Sprint does in fact not renew the agreement the divided is simply not sustainable, Dixon argues. So while the dividend is enticing currently with a 10.6% yield (before today's plunge), this is a dividend trap and would have to be cut.

In addition to the problems stemming from a non-renewal, larger investor Quadrangle recently filed a shelf registration effective on August 3, allowing for the sale of
the 26.8% equity stake.

On the credit side, Dixon notes that S&P credit rating anticipated contract renewal, although they acknowledged it is the single, most important risk factor. If not renewed the debt rating would look "very different."

But all is not lost. The firm sees positive equity value in a takeout scenario of NTELOS and expects interest from T-Mobile USA if Sprint is successful with a counterbid for PCS.

Today's rating call on NTELOS is already having a dramatic impact on the stock. Shares are down 21.8 percent to $12.66.

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