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Merger or No Merger, T-Mobile Is a Buy

T-Mobile is a great company, regardless of what happens with Sprint


Shares of T-Mobile US  (TMUS) have surged more than 60% this year, greatly outperforming larger rivals such as Verizon Wireless (VZ) and AT&T (T), which both posted declines. The upstart wireless provider has basked in extremely positive coverage from both the tech and business press. Wall Street thinks the stock, which has run-up on speculation of a potential tie-up with Sprint, has even more room to run.

The average 52-week price target on the Bellevue, Wash. company is $29.91 — about 13% above where it currently trades. It sports an eye-popping price-to-earnings multiple topping 128, according to Yahoo finance — more than Verizon’s 61.9  and AT&T’s 24.7 combined values. T-Mobile seems to be worth the money, though, given that Wall Street analysts expect the carrier’s revenues to skyrocket 437% in the current quarter, versus the 3% gain expected of Verizon and the 1.3% increase forecast for AT&T.

Setting aside the recent chatter about a potential merger tie-up with Sprint, Chief Executive John Legere should immediately give his entire public relations staff a big fat holiday bonus as a thank you for the overwhelmingly positive press the carrier has received. A recent story in CNET is a case in point.

“T-Mobile, meanwhile, has been solidly on the road to recovery with its Uncarrier campaign, which shed contracts, introduced an early upgrade program, did away with international data roaming charges, and provided free data to tablet customers. In doing so, the carrier has seen growth as customers flocked back to the carrier — a reversal from recent years.”

Earlier this year, Legere, who has a reputation as a maverick, said he was open to potential combinations with Dish Network (DISH) and Sprint, though it chided its larger rival for the slow rollout of its 4G LTE Network. T-Mobile, though, can afford to be cocky. During the most recent quarter, T-Mobile added more than 1 million customers, the most in the industry, thanks to clever marketing ideas such as the “Un-carrier” , which offers consumers more flexible options such as no-contract service, and the ability to upgrade phones more frequently.

T-Mobile is basking in such good press that some pundits have speculated that joining forces with Sprint would somehow quash T-Mobile’s maverick spirit. Indeed, it would be hard to imagine one company being big enough to contain the egos of both Legere and Sprint’s CEO/TV pitchman Daniel Hesse. Circumstances beyond their control, however, may force them to work together even though getting a deal through antitrust regulators would be a huge challenge, as would merging the two disparate technologies used on the T-Mobile and Sprint network.

First, joining the two companies would have 53 million of what the industry calls “post-paid” customers, which are basically the most creditworthy and most lucrative. Even though the combined T-Mobile/Sprint would still lag Verizon’s 95 million and AT&T’s 72 million, it would certainly make the new company a far more relevant competitor than it would be otherwise, thanks to the deep pockets of Softbank CEO Masayoshi Son. Investors would be foolish to underestimate the outspoken CEO, whose fortune tops $9.1 billion, though some observers have wondered if Son, or anybody else, can integrate two huge networks at once.

T-Mobile earns far less than its rivals when it comes to Average Revenue Per User (ARPU). On that basis, T-Mobile earned $52.20 during the last quarter, versus Verizon Wireless’s $112.86 and AT&T’s $65.20. Boosting that metric would probably be difficult for T-Mobile absent a merger, though it wouldn’t be impossible. ARPU is a favorite measurement of Wall Street analysts.

Even if the Sprint deal or one with another potential suitor such Dish Network doesn’t happen immediately, there is reason to expect T-Mobile to continue to win over customers with its maverick ways. But given that it makes so much less money than its rivals,  Wall Street will continue to pressure the company to get bigger. Under either scenario, T-Mobile is a stock worth buying.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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