Leap Wireless: Citi Upgrades; Sees Seasonal Rebound

Leap Wireless (LEAP) shares are trading sharply higher this morning after Citigroup analyst Michael Rollins upped his rating on the stock to Buy from Hold, lifting his price target on the stock to $26, from $20. The new target would be nearly a double from last week’s close at $13.22.

Rollins notes that both LEAP and MetroPCS (PCS) shares have been pummeled on a sharp negative swing in sentiment, as growth prospects have been hurt by both the soft economy and new competition. Nonetheless, he thinks LEAP shares will benefit over the next six moths from four factors:

• LEAP trades at 10x revised 2010 free cash flow forecast without meaningful near-term debt maturities.


• He expects a seasonal rebound to subscriber net adds and the stock heading into Q4 and Q1.


• Merger scenario with PCS can still provide meaningful premium to LEAP; he recommends a pair trade. (In other words, Buy LEAP, short PCS.)


• Implied spectrum value from liquidation analysis may help the stock find support.

Rollins note that he is not making a call on Q3, that he is not denying there is more competition ahead, and that he is not saying LEAP will outperform PCS fundamentally.

I would note also that he repeated his Hold rating on PCS, but upped his target to $11, from $8.

In today’s trading:

• LEAP is up 49 cents, or 3.7%, to $13.71


• PCS is up 1 penny at $6.24.