T-Mobile US (NASDAQ:TMUS), Inc. is an American wireless network operator and the 3rd largest in the US. T-Mobile saw a record rise in the price of its shares as it hit its all-time high in the last week of August on the back of a strong Q2 and positive news surrounding acquisitions that on paper provide the company with access to new markets and synergies across multiple networks. Despite a dip in revenues, the companys Net Income and EPS increased multi-fold on the back of prudent operational management and buyback programs. T-Mobile has outperformed its 2 main competitors; AT&T and Verizon (NYSE:VZ) over the last 5 years across industry metrics and valuation ratios indicate that the companys stock price is yet to reach abnormal levels. The company is focused on acquiring new customers through strategic deals and its vision is firmly rooted toward the future of telecom through the advent of 5G technology. With management focused on buying back more shares by the end of the year, it would be prudent to hold onto shares of T-Mobile to profit from future buyback programs and benefit from regular collections of dividends.
Financial OverviewT-Mobile revenues decreased by 0.68% and 1.2% over the course of the last 2 full financial years from 2021-2023, but what is impressive is that the company managed to decreased their expenses by a larger amount leading to a rise in operating income of 107% comparing 2021-2023. With consistent levels of interest payments through the years, this has led to a 3-fold increase in Net Income from 2021 to 2023.
A cause for concern to the company is the level of the current ratio that is currently below 1 implying that the company does not have enough liquid assets to address any debt concerns in the near-term if they were to arise. To alleviate this liquidity issue, the company has been steadily building up its cash balances, and was able to increase its cash on hand by more than 20% in 6 months since FY2023.
The second concern would be the level of long-term debt. The company has $31 billion worth of senior notes due before 2030, and its long-term liabilities are almost double that of shareholders equity as of FY 2023.
As one of the big three telecom providers in the US, T-Mobile is able to manage its debt expenses through its already existing business presence and loyal customers. With constant interest payments due each year, T-Mobiles strategy in order to manage its debt will be to at minimum maintain its current revenues. A significant dip in core business revenues of more than 15-20% would put into question the companys ability to repay its debt. At present, T-Mobile has done this well, its revenues have increased in FY2024 compared to the previous year (6.9%), but it has also decreased its expenses by a greater amount (2%). T-Mobile was also able to increase net cash from operating activities by 27% for Q2 2024 as compared to 2023. Even though T-Mobile has made acquisitions, some of them like the Metronet acquisition will be completed only in 2025, meaning that the company balance sheet will not be immediately affected.
It is clear that management is focused on efficient management of its finances. Apart from key deals, management is focused on returning value to its shareholders. Although this is a cash outflow, it makes sense from a financial management point of view if sufficient reinvestment opportunities do not exist.
Stock Performance and RatiosOver the last year (from October 2023), the Board has instituted a stockholder return program of up to $19 billion dollars through the repurchase of shares and the payment of cash dividends. The company has already paid out a quarterly dividend of $0.65/share and repurchased $5.3 billion worth of shares since January. As these transactions happen at market price, the shareholder was rewarded for their faith in the company. As of Q2, the company still has $8.7 billion of share repurchases and dividend payments remaining until the end of 2024, which is a promising rewarded for an investor in T-Mobile especially considering the stocks recent rise in price.
The effect of this program as well as the increase in operations that led to a rise in Net Income despite decreasing revenues has led to a 3.5x increase in EPS as on 31st December 2023 compared to the preceding 2 years.
T-Mobile has performed remarkably well on a Total Return basis vs the S&P500 over the last 5 years but what is more impressive is that discounting the effects of repurchases and dividends, T-Mobile has also outperformed the S&P500 over 1 year and 5 years on a solely Price Return Basis as seen in the graphs below.
Comparatively, in a 5-year time period, Verizon returned -25% and AT&T returned -41%. On that front, T-Mobiles performance has been leagues ahead of its two fiercest competitors, and its strong performance highlights the key measures taken by management.
As price always leads earnings, the recent performance of the T-Mobile stock has led to an increase in P/E to 25.13 as compared to the companys competitors. For e.g.: Verizons P/E is 9.76 and AT&Ts P/E is 9.57, This is the result of the large buyback program instituted by T-Mobile, as buying back shares leads to an increase in the share price. With more buybacks due in 2024, there is a strong likelihood that T-Mobile shares will increase further in price.
A reassuring sign for investors concerned over a run up in the price would be analyzing the PEG ratio that compares P/E to earnings growth. A lower value indicates that the stock price has not caught up with the level of earnings growth. The forecasted PEG ratio for T-Mobile is 1.09. This suggests that P/E is increasing in-line with earnings and not in an absurd manner and that T-Mobile is fairly priced at its current level. This is much better than Verizon and AT&T with horrible PEG ratios of 4 and 3.78 respectively.
Key Industry MetricsThe rapid rise in T-Mobiles stock price can also be attributed to the company outperforming estimates and leading the telecommunications industry in the subscribers acquisition front. T-Mobile added 770k post-paid subscribers (highest Q2 for T-Mobile), beating analysts expectations by 21%. In contrast, AT&T and Verizon added 419k and 148k subscribers respectively in the same period. Apart from a strong Q2 2024, another factor working in favor of T-Mobile is the sustainable nature of its subscriber growth post the merger with Sprint in Q1 2020, as seen in the graph below.
There are 2 key metrics that are particular to the telecommunications industry. The first is the churn rate, i.e., the number of subscribers who leave a carrier for another one. T-Mobile had a churn rate of 0.87% in its postpaid and 2.76% in its prepaid segment for FY2023; both being the lowest in company history. These metrics have improved even further going in to 2024. Current Q2 figures for prepaid churn stands at 2.54%, and for postpaid at 0.8%. AT&Ts churn was marginally higher, with 0.85% and 2.57% for the post and pre-paid segments. For Verizon, postpaid churn was a similar level at 0.89% but prepaid churn was much higher for Q1 2024 at 4.26%. Thus, over the last few years, T-Mobile has emerged as the leader in customer retention.
The second metric is the Average Revenue Per User (ARPU) which illustrates the companys operational performance. The ARPU for T-Mobile as of Q2 2024, is 49.07%, compared to 48.7% last quarter and 48.84% for FY2023. ARPU generally increases when a company can offer a bundled service, and this works well for T-Mobile as the company has integrated itself across the network through its acquisitions and has the ability to offer packaged services for customers.
Key InvestmentsT-Mobile has directed funds into strategic business acquisitions. The first was the joint venture with investment firm KKR to acquire residential fiber company Metronet, with the company becoming a wholesale fiber provider to T-Mobile and all its residential customers, over 2 million across 17 states, being transferred to the parent company. Earlier in the year, T-Mobile acquired Lumos, which provides landline fiber broadband services. T-Mobile is investing upwards of $1.5 billion in the venture, with a goal to reach 3.5 million homes by 2028.
From a valuation perspective, there are 2 inferences from these investments. The first is that these acquisitions will increase the Total Addressable Market (TAM) for T-Mobile. In a saturated telecom market, new avenues to access customers are the primary growth drivers and loyal customers of these acquired companies becoming customers of T-Mobile is a key component of T-Mobiles growth vision for the rest of the decade.
The second would be cross-functional synergies. Currently, about 75% post-paid T-Mobile users are on a 5G device. T-Mobiles current 5G network capacity is limited but access from its subsidiaries that have the necessary fiber infrastructure in place will provide customers with more capacity and faster connections. T-Mobile is heavily invested in 5G technology, and is positioning itself well to profit from that through the acquisition of fiber companies that tie in to that vision.
5G Sector GrowthThe 5G industry is expected to grow rapidly within the next decade and T-Mobile is at the forefront of capitalizing from this expansive growth. The North American 5G market is expected to grow at a CAGR of 50% until 2030, with the global market expected to grow at almost 59% CAGR.
Governments have started to recognize the transformative effect that 5G technology can have and are investing heavily in order to ensure widespread adoption. T-Mobiles Ultra Capacity 5G network covers more square miles than AT&T and Verizon combined. Thus, T-Mobile has positioned itself through its acquisitions to ensure that it derives significant value from this high-growth industry.
Future OutlookT-Mobile is currently having its best performance in the stock market, and this can be attributed to large programs from management to return value back to the shareholders. Share repurchases and strong Q2 2024 earnings have led to a sharp increase in the EPS and consequently the share price. Investors have displayed confidence in managements ability to identify strategic business opportunities and the company has directed large amounts of funds in acquiring businesses within or in similar industries in order to bolster T-Mobiles capabilities across both mobile and fixed networks. The company has also outperformed across key metrics specific to the telecommunications industry like subscriber growth and churn rate. Through significant investment in the 5G space, T-Mobile hopes to become the dominant player in the telecom industry.
Causes for concern include liquidity issues with a weak current ratio and large sums of long-term debt due before the close of the decade. With revenues remaining stagnant since 2021, a large portion of T-Mobiles future performance is contingent on T-Mobiles investments realizing their full potential. At this point, I would suggest a long-term shareholder in T-Mobile to hold onto their shares to benefit from future dividend payments and share repurchases as promised by management.
This content was originally published on Gurufocus.com
