How To Play T-Mobile US Stock – T-Mobile US, Inc. (NASDAQ:TMUS)

Investment Thesis

T-Mobile US‘s (NYSE:TMUS) stock needs to be on a watch list right now because of the post-merger integration with Sprint (NYSE: S) which is still ongoing. The stock became more attractive because of the Trump tax cuts, but the post-merger integration needs to play out before any plans for purchasing the stock.

Introduction

T-Mobile US is a mobile telecom operator based in the US, and it is a subsidiary of Deutsche Telecom. It currently has 71 million customers in postpaid, prepaid and wholesale markets. The current incarnation of T-Mobile US was formed from the merger with Metro PCS in 2013.

Financial Analysis

T-Mobile US

Profitability Indicator Ratios

2017

2016

2015

2014

Gross Profit Margin

56.39%

58.94%

64.56%

58.03%

Operating Profit Margin

11.46%

11.42%

11.86%

6.98%

Pretax Profit Margin

7.78%

7.37%

7.26%

3.31%

Profit Margin Analysis (Net Profit Margin)

11.17%

5.46%

4.55%

2.48%

Effective Tax Rate

-43.50%

25.87%

37.26%

25.05%

Return On Assets

6.65%

3.17%

2.45%

1.38%

Return On Equity

22.24%

11.70%

9.06%

4.90%

T-Mobile US’s gross profit margin remained flat from 2014 to 2017 because the cost of services and cost of equipment remained flat. T-Mobile’s operating profit margin improved from 2014 to 2017 thanks to faster increases in sale than in selling, general and administrative expenses, and depreciation and amortization. The sales increases were due to increases in branded postpaid and prepaid revenues and increases in equipment sales. Additionally, T-Mobile’s pretax profit margin increased from 2014 to 2017 due to interest expenses only increasing slightly, but revenues increased faster. T-Mobile’s net profit increased from 2014 to 2017 due to increased sales and positive effect of tax cuts, as described earlier, and the company’s effective tax rate resulted in a tax benefit because of the positive effect of tax cuts in the United States in 2017. Returns on assets, equity and capital employed all improved from 2014 to 2017 thanks to increased profitability. Profitability is going to increase with the merger with Sprint, and it’s going to give the resulting company after the merger scale and pricing power against AT&T (NYSE: T) and Verizon (NYSE: VZ).

T-Mobile US

Debt Ratios

2017

2016

2015

2014

Debt Ratio

68.03%

72.32%

73.48%

72.35%

Interest Coverage Ratio

2.89

2.63

2.35

1.65

Financial Leverage Ratio

3.34

3.69

3.70

3.56

T-Mobile US’s debt ratio remained flat from 2014 to 2017, but remained high because of high long-term debt, accounts payable and accrued liabilities. The company’s interest coverage improved from 2014 to 2016 due to improved profitability, and its financial leverage remained flat from 2014 to 2016.

T-Mobile US

Investment Return

2017

2016

2015

2014

Price/Book Value Ratio

2.39

2.77

1.94

1.40

Price/Earnings Ratio

11.91

24.86

22.03

29.88

Dividend Yield

0.11%

0.11%

0.17%

0.25%

T-Mobile US’s price-to-book value increased from 2014 to 2017 because of stock price appreciation, which was due to increased profitability during this period. The company’s price-to-earnings ratio increased from 2014 to 2016 because of stock price appreciation due to increased earnings, although the market priced further earnings as increasing in appreciation. Hence, the stock price increased faster than the earnings, but the price to earnings ratio decreased in 2017 because of the sharp increase in earnings. T-Mobile US’s dividend was very weak from 2014 to 2017.

Future Outlook

T-Mobile US’s merger with Sprint would create a strong network that can battle AT&T and Verizon as the industry moves to 4.9/5G services in the US. This 5G service is obviously going to require significant investment; hence, the need for the merger with Sprint. So far, Verizon is ahead of the game in 5G deployment and T-Mobile/Sprint will need to conclude their merger quickly and accelerate the deployment of 5G services, which, when deployed, will bring in increases in earnings, and hence, a more attractive stock valuation for the newly merged company. 5G wireless technology is going to increase speed and responsiveness of mobile telecommunications. Also, this will spur innovations, including driver-less transportation, that need lots of reliable communications to function properly.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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