This post was originally published on this site
T-Mobile US Inc. isn’t done realizing the potential from its 2020 merger with Sprint—and those untapped opportunities could end up helping its stock this year.
Goldman Sachs analyst Brett Feldman feels upbeat about the prospect of “further attainment of merger integration milestones” for T-Mobile
TMUS,
and it’s one reason why he named its stock a top pick for 2022. Feldman elevated the stock to Goldman’s Conviction List Tuesday, dubbing the company his “favorite wireless execution story.”
Shares of T-Mobile are up 3.7% in Tuesday afternoon trading.
T-Mobile could complete two big merger integration projects in 2022, according to Feldman, by decommissioning Sprint sites it no longer needs and conducting billing migration for Sprint customers.
The billing migration would be a key milestone for T-Mobile because Feldman believes that Sprint customer churn is weighing on T-Mobile’s otherwise strong net-addition numbers. Many Sprint customers have had their rate plans “mapped to T-Mobile plans” and more than half have upgraded their devices or SIM cards, allowing them to mostly take advantage of T-Mobile’s network, Feldman said. But the company hasn’t yet gone through the billing-migration component, and only a fraction of Sprint customers have been fully moved over to T-Mobile service.
“As a result, the large majority of legacy Sprint customers still see themselves as Sprint customers (vs. T-Mobile customers) and are not fully benefiting from the T-Mobile network, its customer service and its highest value plans,” he wrote.
Subscribe: Want intel on all the news moving markets? Sign up for our daily Need to Know newsletter.
T-Mobile’s management team has indicated that the relatively few Sprint customers who have already gone through full migration are showing low churn levels similar to what core T-Mobile sees, Feldman said. This suggests that overall company churn could “improve materially” starting in the middle of the year, when the billing migration is expected to take place.
Feldman is also enthusiastic about the possibility that T-Mobile could launch a buyback program in 2023 and conduct $60 billion in repurchases through 2025. Investors could get more visibility into when that hypothetical buyback program might actually begin after the Federal Communications Commission reveals the winning bidders of a recent wireless-spectrum auction and the amount that each company committed to purchase.
This auction represents “the last material use of capital beyond the carrier’s ongoing capex and merger integration spending,” Feldman wrote.
See also: Take-Two’s ‘dramatic change of heart’ on free gaming prompts downgrade
From a valuation perspective, he sees T-Mobile shares as appealing, arguing that the carrier “is being valued like a wireless incumbent, not a higher-growth share-taker.” T-Mobile trades at 7.8 times enterprise value to 2022 estimated earnings before interest, taxes, depreciation, and amortization (Ebitda), compared with 7.5 times for Verizon Communications Inc.
VZ,
It also trades at a discount to Verizon on taxed free-cash flow per share, with a 11.2x ratio versus 11.9x for Verizon.
“For all of these metrics, we view TMUS’s relative valuation vs. VZ’s as attractive as we expect that T-Mobile will grow materially faster than Verizon, based on our outlook for sustained share gains,” he wrote.
Feldman removed Verizon from the Conviction Buy list, though he kept a buy rating on the stock. He sees the possibility of a slowdown in net additions this year after a “record” 2021: Verizon and AT&T Inc.
T,
have both been key beneficiaries of Sprint churn, by his estimation, but the pool of Sprint churners could shrink this year and next.
Verizon shares are down 0.3% Tuesday.
