In this article, let's take a look at T-Mobile US, Inc. (TMUS, Financial), a $23.59 billion market cap company, which offers digital wireless services in the U.S. under the T-Mobile and MetroPCS brands.
“Iphone era”
The company operates in a highly competitive industry with technological advances in digital signal processing and transmission technologies.
The “iPhone era” made the firm to generate significant operating results. The company reversed the results of the two previous years due to the postpaid customer growth. The company developed a brand strategy, which consists of unique rate plans. Although this has given more flexibility, we believe it cannot consistently adapt to changes.
Looking forward, the firm has a great challenge in the investment arena, towards the development of new applications.
MetroPCS
Due to the merger with MetroPCS, the company holds large contiguous blocks of spectrum in the PCS and AWS bands. Further, a deal to acquire a portion of Verizon's holdings in the 700 MHz block could help to improve its network coverage.
Postpaid business
In 2012, the company made changes in order to improve the market position of its postpaid business. The launch of a new branding campaign around the "uncarrier" designation as well as the creation of rate plans that separate service and phone pricing have helped to generate good cash.
Future actions
With less than a half the size of its rivals like AT&T and Verizon, the firm operates at a cost disadvantage. But this doesn´t mean that T-Mobile will continue to invest in network capacity while trying to keep good returns on capital.
Revenues, margins and profitability
Looking at profitability, revenue growth by 15.36% led earnings per share sharply increased in the most recent quarter compared to the same quarter a year ago ($0.48 vs -$0.02). The gross profit margin of nearly 50% is considered good enough. Despite this, the company's net profit margin of 5.44% is not so big.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
Ticker Company ROE (%)
TMUS T-Mobile 0.25
VZ Verizon Communications 29.6
T AT&T Inc 20.06
S Sprint Corp. -25.29
Industry Median 11.93
The company has a slightly positive ROE of 0.25% which is higher than the one exhibited by Sprint Corp. (S, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Verizon (VZ, Financial) and AT&T (T, Financial) could be better options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 164.4x, trading at premium compared to an average of 23x for the industry. To use another metric, its price-to-book ratio of 1.6x indicates a premium versus the industry average of 3.2x while the price-to-sales ratio of 0.7x is above the industry average of 1.71x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
The company holds valuable assets which are difficult to replicate by its peers. It also has an ample network and spectrum resources to satisfy customer demand in the near future.
So in this opportunity I would recommend to add this stock to long-term portfolios.
Hedge fund gurus like Jim Simons, George Soros, Paul Tudor Jones and Jeremy Grantham added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
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