Why We Increased Our Price Estimate For T-Mobile

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TMUS: T-Mobile US logo
TMUS
T-Mobile US

We are increasing our price estimate for T-Mobile (NASDAQ:TMUS), the third largest U.S. wireless carrier, from $50 per share to about $64 per share, which is roughly in line with the current market price. Our price revision is driven primarily by the carrier’s continued strength in the postpaid phone space as well as growing optimism surrounding its M&A prospects. Below we discuss the updates that we have made. 

See our complete analysis for  Verizon | AT&T |T-MobileSprint 

Strong Customer Growth, But Competition Is Heating Up

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T-Mobile has developed a reputation for disrupting the wireless status quo, with customer-friendly moves such as eliminating two-year contracts and introducing all-in pricing for wireless service plans. The positive brand perception, as well as the carrier’s rapidly improving network performance, have allowed it to capture practically all of the industry’s postpaid growth over the last two years. Over 2016, the carrier added 4.1 million branded postpaid customers, while posting double-digit growth in service revenues. While T-Mobile has guided for lower growth in 2017, projecting 2.4 to 3.4 million in postpaid net adds, it does have a track record of steadily boosting guidance as the year progresses.

That said, competition in the wireless market is mounting. Sprint has regained some traction, posting its best phone subscriber growth in close to four years over the holiday quarter, driven by aggressive promotional activity. Verizon, the largest wireless carrier, recently reintroduced its unlimited plan with relatively attractive features including HD video streaming, indicating that it is taking the threat from the smaller carriers seriously. There is a possibility that the pricing activity could weigh on T-Mobile’s margins in the near term.

M&A Opportunities Could Provide Some Valuation Upside

There has been increased speculation that T-Mobile could be involved in some deal-making activity after the completion of the FCC’s ongoing spectrum auction, on account of the potentially more conducive regulatory environment in Washington. Sprint, which courted T-Mobile a few years ago, remains interested in a deal. For instance, Reuters reports that Sprint’s parent company Softbank is willing cede control to Deutsche Telekom (T-Mobile’s parent) in order to facilitate a merger between the two U.S. wireless carriers. As wireless is a high-fixed cost business, the magnitude of cost synergies could be significant in the event of a merger (present value of as much as $20 billion, per our estimates), adding significant value for shareholders of both companies (related: A Sprint-T-Mobile Merger Would Make Financial Sense). That said, the market appears to have priced in much of the M&A chatter, as T-Mobile’s stock is up by close to 20% since the election results came out last November. There is a risk that the stock could correct somewhat if M&A activity does not eventually materialize.

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