We maintain our Hold recommendation for Telephone & Data Systems Inc. (TDS), following the release of recent quarterly results. Although the management has reduced its 2008 outlook for revenue and subscriber additions, it continues with share repurchase initiatives.

TDS is focusing on improving profitability through network technology upgrades, strengthening its brand image and expansion of network coverage through acquisitions. Although recent quarterly results were above of our expectations, we are not yet convinced that the company can sustain the earnings momentum in future reporting periods, principally due to higher expenses for wireless infrastructure upgrades and promotional campaigns.

TDS is trading at 9.1x estimated earnings for 2008, which is at a discount to both the S&P 500 and the industry group (wireline/integrated telecom service providers) average. On the basis of enterprise value (EV) to estimated 2008 EBITDA, the stock is also trading at a discount to its industry peer group.

We believe the shares are priced near fair value, considering that the company's above-average growth rate is derived from the wireless unit United States Cellular Corporation (USM). Valuations for cellular holdings have been mixed, spurred by recent merger activities, but also impacted by overall economic conditions. We have reduced our six-month price target to $27.50 based on a 2008 earnings multiple of approximately 9.5x.

Anindya Barman contributed to the report.