T-Mobile US Inc Remains a Great Business in a Bad Sector

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T-Mobile stock - T-Mobile US Inc Remains a Great Business in a Bad Sector

Source: Mike Mozart via Flickr (modified)

There’s a pretty clear bull case for T-Mobile Us Inc (NASDAQ:TMUS). T-Mobile stock looks like the best play in the U.S. wireless sector. The company is coming off a year of record performance — and yet the TMUS stock price hasn’t moved in the last 12 months.

But that flat performance over the past 12 months actually is pretty good considering the travails facing the industry. Sprint Corp (NYSE:S) has fallen 38% over the past year, in part because hopes of a merger with T-Mobile have been dashed. Verizon Communications Inc. (NYSE:VZ) is down 4%+. AT&T Inc. (NYSE:T) has fallen 14%.

The problem remains the same as it was last year: T-Mobile is the best pick in a very difficult business. And 2017 results, and 2018 guidance, show that’s probably not enough to get too excited about T-Mobile stock.

Is T-Mobile Stock Price Cheap?

T-Mobile stock does look reasonably cheap. At the midpoint of 2018 guidance, the EV/EBITDA multiple sits at a relatively attractive 7x. TMUS stock trades at a bit over 15x fiscal year 2019 analyst earnings-per-share estimates, and as little as 10x 2018 free cash flow.

Those multiples generally are below the market as a whole, and for the most part imply relatively little growth. But that’s actually what T-Mobile is generating at the moment.

That’s not to say T-Mobile is performing poorly. The company is taking market share, with net additions well ahead of Sprint and Verizon (AT&T actually saw its net subscribers decline in 2017). It’s improved its network. Revenue grew 8.3% in 2017.

And yet, in terms of profit, the performance simply isn’t that spectacular. Adjusted EBITDA rose 5% in 2017 — admittedly with 2 point impact from hurricanes. Guidance suggests, even at the high end, less than 5% growth in 2018,  with nearly all of that coming from the hurricane impact the year before and a minor change in revenue recognition.

Free cash flow will improve markedly, as it did in 2017, thanks to lower capex spend. Tax reform means T-Mobile won’t pay cash taxes until 2024, by its estimates. But where it counts — profits — the news simply isn’t that good. And the reason the news isn’t that good is because the industry remains so challenging.

Industry Problems Facing T-Mobile Stock

As impressive as T-Mobile’s customer count growth is, it’s not necessarily translating to profit growth. And one key reason is that the industry remains so competitive on pricing.

T-Mobile’s postpaid ARPU (average revenue per user) actually declined 4.1% year-over-year in the fourth quarter. The pressure came from higher promotional activity used to capture those new customers. T-Mobile is forecasting stable ARPU next year — at the same time costs are rising.

As a result, it’s tough to expand margins. Adjusted EBITDA margins compressed modestly in 2017, and guidance suggests a similar trend this year. And as impressive as T-Mobile’s relative performance has been, it’s not enough to overcome the problem facing the industry. There simply aren’t that many new customers — and all of the big four are competing on price to capture those customers and poach existing subscribers from rivals.

That combination creates, overall, limited revenue growth and lower margins for the group as a whole. Even as T-Mobile continues to prove itself best in breed, it can’t fully escape that headwind against the industry.

Better Choices Than T-Mobile Stock

Again, I do see T-Mobile stock as the best in the space, although that’s not much of a recommendation. AT&T stock looks like a value trap, and I’m not much higher on either VZ or S at this point.

Even with the challenges, I don’t see TMUS stock as a bad choice. There is a potential merger and acquisitions case here, with cable operators like Comcast Corporation (NASDAQ:CMCSA) and Charter Communications Inc (NASDAQ:CHTR) as possible suitors. Free cash flow over the next two years should be impressive. Both T-Mobile and parent Deutsche Telekom AG (ADR) (OTCMKTS:DTEGY) are repurchasing shares. And the rollout of 5G next decade could prove a boon for T-Mobile, and the industry as a whole.

But the bull case simply isn’t strong enough in the current environment. There are too many challenges ahead, and T-Mobile’s execution has to be perfect to grind out growth. So far, it’s been close to perfect, and one reason why TMUS stock has soared over the past few years. But the easy money has been made — and a tough industry awaits.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/t-mobile-us-inc-tmus-stock-great-business-bad-sector/.

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