T-Mobile's stock slump offers buying opportunity
After a couple of failed takeover offers, T-Mobile US (TMUS) shares are trading under $27 for the first time since 2013. CEO John Legere has executed a turn around almost flawlessly at the fourth-largest mobile carrier, but the stock is still down 20% year to date, presenting a buying opportunity for investors.
The latest drop, 5% this week so far, followed news that French telecom upstart Illiad and Xavier Niel, its former peepshow parlor owning founder, had ended a quixotic effort to buy the much larger T-Mobile. T-Mobile’s majority owner, Deutsche Telekom, reportedly was unimpressed with Illiad’s latest offer of $36 for 67% of the US unit.
Even without a takeover, T-Mobile has enough strength on its own to keep outgrowing the rest of the industry, according to some analysts and investors.
The stock’s recent drop “does not reflect the company's solid operating trends and assigns too much weight to the lack of near-term M&A prospects,” writes RBC Capital analyst Jonathan Atkin, one of three analysts to raise their rating to “buy” over the past week, according to FactSet.
Under Legere’s “Uncarrier” strategy, T-Mobile has added almost 5 million net new customers this year, including over 3 million who pay monthly bills, the more valuable so-called postpaid subscribers. And with Sprint (S) still struggling to improve its network, Legere is likely to soon achieve his aim of overtaking his rival to grab third place in the US market.
T-Mobile’s gains have come in part thanks to sharp price cutting, but the strategy also involved getting customers to pay for fancy smartphones upfront, saving the company subsidy payments, and to trade in older devices, which the company can resell at a profit. As a result operating income could exceed $1.5 billion this year, up from $1 billion last year and an operating loss of $6.4 billion in 2012, before Legere took over.
T-Mobile releases its third quarter results on October 29, and Legere has already disclosed that the carrier gained more customers in August than in any prior month. Analysts expect T-Mobile added a net 1.4 million new customers in the quarter, pushing revenue up 11% to $7.4 billion and earnings per share to 5 cents, up from a loss of 3 cents a year ago.
The latest piece of the “Uncarrier” strategy offered subscribers a free wifi router from Asus and software enhancements to allow voice calling and texting over wifi from newer model phones, including the iPhone 6 and 6 Plus. That should help cover up some of the holes in the company’s network, which has tremendous bandwidth for high speed downloading but less geographic coverage than rivals AT&T (T) and Verizon (VZ).
To be sure, T-Mobile's success is not guaranteed. His larger rivals could get more aggressive about price cutting, but analysts don't expect that scenario. Sprint is engaging its own belated turn around under new CEO Marcelo Claure. And T-Mobile may have to spend big at upcoming spectrum auctions over the next year to fill the gaps in its network, which could depress profitability and cash flow.
Investors will also be keeping an eye on potential takeover bids that could materialize over the next year or two. Dish Network (DISH) chairman Charlie Ergen has been in touch with Deutsche Telecom regarding his interest in buying T-Mobile, according to several reports last month. Ergen may be waiting until after the next big U.S. spectrum auction, which is slated for November.
And Legere has speculated that some of the big tech companies such as Google (GOOGL), Facebook (FB) or Amazon (AMZN).
“What about Dish? And, what about Google? Do you think they aren’t going into this business?” he asked on October 3 at the Geekwire Summit in Seattle. “What about Facebook? Amazon? Or Telmex, now that they are done having a love affair with AT&T?”
Some of that may be pie-in-the-sky talk from a CEO known for his brash attitude. But if the company keeps growing faster than rivals, potential bidders are sure to notice.
