T-Mobile Us Inc Stock Offers A Good Story At A Discounted Price

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TMUS stock - T-Mobile Us Inc Stock Offers A Good Story At A Discounted Price

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In the U.S. wireless carrier wars, T-Mobile Us Inc (NASDQ:TMUS) isn’t often talked about as a serious contender to the throne. Instead, the conversation often revolves around the mobile duopoly of Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T).

Granted, Verizon and AT&T are both larger and more profitable than T-Mobile. But because they are so large, Verizon and AT&T haven’t grown much over the past five years, and their stocks haven’t done much, either. T-Mobile, though, has grown a whole bunch over the past five years. And TMUS stock has soared. It is up 175% over the past five years, versus a 5% decline for VZ stock and an 8% decline for T stock.

Clearly, in the markets, TMUS stock is the winner in the wireless carrier wars.

This should continue. T-Mobile is making all the right moves to both grow the company’s market share and improve long-term profitability.

At current levels, TMUS stock trades at a discount to its realistic growth prospects. Moreover, there is a sizable M&A catalyst on the horizon with Sprint Corp (NYSE:S). Although they were pronounced dead, T-Mobile Sprint merger talks are reportedly back on the table.

All in all, TMUS stock is not only undervalued at current levels, but it is also staring at a potentially huge M&A catalyst. That makes TMUS stock look pretty tasty here and now.

Here’s a deeper look.

All the Right Moves

When it comes to T-Mobile, management is making all the right moves to grow the company’s market share and improve long-term profitability.

T-Mobile continues to disrupt the whole wireless industry with its un-carrier program, which is both innovative and has been well-received by consumers (again, T-Mobile is growing at a robust clip whereas AT&T and Verizon have been essentially stagnant). That un-carrier program has aligned T-Mobile with some very hot brands, like Netflix, Inc. (NASDAQ:NFLX), and it is now pivoting into the red-hot internet TV market, a move which should only bolster the popularity of the program.

As such, T-Mobile should continue to see strong adds in its core markets due to better-than-expected adoption of the company’s un-carrier model.

Moreover, T-Mobile should see strong adds outside of its core markets as the company dramatically expands its retail presence. According to management, there are roughly 100 million people in the U.S. with whom T-Mobile has zero penetration. That is about to change. T-Mobile is aggressively expanding its retail presence in those “greenfield” markets to start gaining traction among those 100 million Americans.

With an innovative, differentiated and still-getting-better un-carrier model underlying the business, T-Mobile should have no problem rapidly growing market share in these new markets.

Plus, the company has some buybacks in the mix. There is the whole 5G tailwind, which should kick in before the end of this year and which T-Mobile CEO John Legere believes will be huge for the company as they “leapfrog” AT&T and Verizon. There are also the merger talks with Sprint which, if true, could significantly boost the likelihood of dethroning AT&T and Verizon.

Discounted T-Mobile Stock Price

Due to the un-carrier model, massive retail expansion and 5G roll-out, T-Mobile should be able to post strong growth over the next several years.

Revenues have grown at a 15% clip over the past five years. That growth rate has come down with scale (just 8% last year). It will continue to go down with scale, but the retail expansion part of TMUS should keep growth up. As such, revenues should be able to grow around 5% per-year over the next five years.

Operating margins have been zooming higher, and reached 12% last year. That is still below where AT&T (13%) and Verizon (22%) operate at. But continued strong growth should allow for continued margin expansion for TMUS. Overall, 15-20% operating margins seem realistic in five years (or 17.5% at the midpoint).

Revenue growth of 5% per year on 17.5% operating puts revenues at $51.8 billion and operating profits at $9.1 billion in five years. Taking out $1.7 billion for net interest expense, 25% for taxes and dividing by presumably 900 million shares out, that equates to roughly $6.15 in earnings-per-share in five years.

A market-average 16-times forward multiple on those $6.15 earnings implies a four-year forward price target of $98. Discounting that back by 10% per-year, you arrive at a present value of roughly $67.

Bottom Line on TMUS Stock

TMUS stock has a good growth narrative that is one part market share expansion and one part improving profitability. Despite the huge run-up in stock price over the past five years, TMUS stock still trades a relative discount to its fair value considering the strength of that good growth narrative.

All in all, a good growth narrative plus a discounted stock prices makes TMUS stock look interesting here and now. Especially with T-Mobile Sprint merger talks on the table.

As of this writing, Luke Lango was long T, TMUS and NFLX.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/t-mobile-us-inc-stock-offers-a-good-story-at-a-discounted-price/.

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