History:
T-Mobile Inc. (TMUS, Financial) was formed in 1994 as Voice Stream Wireless PCS, a subsidiary of Western Wireless Corporation. Voice Stream was spun off from Western Wireless in 1999 acquired by Deutsche Telekom AG in 2001 and renamed T-Mobile USA, Inc. in 2002.
T-Mobile US, Inc. was formed in 2013 through the business combination between T-Mobile USA and MetroPCS Communications, Inc. Under the terms of the business combination with MetroPCS, Deutsche Telekom received shares of common stock representing a majority ownership interest in the combined company in exchange for its transfer of all of T-Mobile USA’s common stock. The business combination aimed to provide us with expanded scale, spectrum, and financial resources to compete aggressively with other, larger U.S. wireless communication providers. The business combination was accounted for as a reverse acquisition with T-Mobile USA as the accounting acquirer.
Note: T-Mobile USA’s historical financial statements became the historical financial statements of the combined company. See Note 2 – Business Combination with MetroPCS of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information regarding the business combination.
Segments of Business
The Company is organized into three business segments:
1) Post-paid Customers
2) Prepaid Customers
3) Wireless Communication
Description:
After the incorporation of T-Mobile US, in 2013 the new management team formed who quickly tackled all the weak areas of the firm that had led to it losing significant market share to the competition.
Areas where management focused are:
1) LTE build-out compared to the peer group, lack of
2) IPhone device availability,
3) Improving its coverage map
4) Simplifying its pricing strategy.
The fruitful results of such a transformation have been nothing short of amazing. In 2011 and 2012, the company typically saw post-paid churn above 2.4%, high capex spend, and negative yoy EBITDA growth. Meanwhile, as you may expect, it was losing subscribers to the tune of 2-plus million per year.
Since the company was rejuvenated with new management who reinvigorated the brand, the results have been starkly different. In 2013, the first year of the strategic shift, subscribers rose by just over 2 million subs, churn dropped to 1.69%, and capex dropped to just $1.1 billion. By 2014, subscriber growth jumped by 4.9 million, churn continued to fall to 1.5%, and EBITDA started growing again. In the meantime, the company surpassed Sprint - when you include MetroPCS and Boost subs - as the number three wireless brand in terms of customer base. By the end of 2014, TMUS had 55 million customers, up from just 33 million in 2012.
Outlook:
Every business get benefited if there is an economy of industry is present and the same has happens with T-mobile, they got the advantage in wireless business. Today T-mobile has a strong customer base which mostly shift from Sprint. Due to mismanagement in Sprint there services get impacted which result in poor customer service which consumer does not like and take a shift to T-mobile who recently cope up with all its backlog after the arrival of new management.
T-mobile has recently introduce its “UN carrier” program in this T-mobile has finished all the contracts which usually customer feel are quite rigid and indecipherable. The Un-carrier program becomes a startegic boon for the T-mobile which help the organization to make a strong customer base.
Apart from this T-mobile has dubbed its UN-carrier program with the some of new feature that are:
5.0 program it is a company’s test driver program in this T-mobile some of the new subscriber to test I-phone 5S for seven days at no cost.
6.0 program In this program T-mobile allowed its subscriber to listen their favorite music without using their data bank.
7.0 program In this T-mobile allowed its user to make cals or text message with the help of wi-fi.
8.0 program is also known as Data Stash program in this T-mobile allows its user to roll over their unused data to the following month
Looking at the above services consumer responded positively looking at the response and positive attitude of customer toward T-mobile it can be assumed that going forward T-mobile will have significant leverage opportunities that they can attract many new subscribers who are looking for unlocked phone or want to get themselves free from the rigid contracts.
Performance of T-mobile in 2015
Recently T-mobile revolutionized the wireless industry and it has been believed that in future T-mobile will definitely continue to revolutionize the wireless industry by launching some more new programs at its UN-carrier program. I believe that the T-mobile will add around 3 to 4 million postpaid subscriber in 2015-16 which help them to ramp up their free cash flow and EBITDA if they take the advantage of company leverage to its operating base of fixed assets.
Recently a research was done by JD power on network quality which shows that T-mobile remained at the third place, where it has been for a year now. Last year T-mobile was at second place in some area mostly in north east & west. Now in the year 2015 AT&T has invested in massive expansion of its network with that AT&T headway again those regions and now again T-mobile ceded those regions back to AT&T. Now some sign of saturation is viable as T-mobile adding millions of new users which may likely reduce the network quality.
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To mitigate the saturation, this year for the first time company rolling out its newly acquired 700mhz spectrum deployment by the end of the year, which allow band signals to travel much further which helps T-mobile cover more users with same amount of cell towers. Last year T-mobile purchased tons of spectrum license from Verizon wireless for $2.4 billion, since then T-mobile covers 60% of the U.S. Population and move 70% of its own customer base to 700mhz. A PC magazine claims that with the deployment of 700mhz frequency T-mobile customers would experience improved services in both service quality and data speeds.
In the year 2015 T-mobile management is aiming to cover the 300 million Americans with LTE services by the end of the fiscal year which eventually AT&T Verizon both together claim to serve. The year 2015 is a pivotal year for the T-mobile as with the new spectrum and following coverage growth rate T-mobile would be able to serve those customers to whom earlier they were not able to cover. Apart from this with the better network quality will decrease the churn rate and help them further boosting their net subscriber rate.
Financial performance: Spike is Coming in EBITDA & FCF
I think that all of the above factors is converging to continue to boost subscribers, which soon will boost EBITDA and FCF. EBITDA generation typically lags the growth in gross subs, as upfront promotional programs take time to wind through the new subscriber and work through the income statement. But looking at the last year subscriber growth rate, mostly coming through the the highly competitive second half, I think those new subscribers will start contributing to EBITDA somewhere in the second and third quarters of 2015.
I think EBITDA should grow significantly in excess of $7.0 billion in this year compares to $5.3 billion last year. Due to company heavy investment and investment in build out for last two years, EBITDA of T-mobile had been stuck around mid-$5 billion. The stock price has responded positively whenever T-mobile saw strong ramp up, the last ramp up was in the year 2012-13 when new management came and restructured its operation.
Looking at the above stock chart of Bloomberg I think another ramp-up in EBITDA is set to start this year and will last for at least two year could be longer. Estimates for this year continue to increase on the back of the strong subscriber numbers it continues to put up. I believed that company could surprise to upside due to its promotional deals and increase in the subscribers.
I believe the incremental subscriber growth, along with some higher pricing overall on its more recent promotional deals, could allow the company to surprise to the upside. While the market has anticipated this EBITDA ramp-up, we don't think it expects a continued growth trajectory beyond the next two years. Our thesis on that is predicated on a superior customer service profile, while differentiation between LTE service levels declines. Essentially, the business is becoming commoditized, with the true differentiator being customer service and pricing.
Analyst at the Street is hanging near to the mid-point of the company's guidance, with consensus right around $7 billion (company estimates were between $6.8 and $7.2B). But, I believe that the only risk to investors on the account of the strong customer growth and higher pricing is that they can exceed the range to the upside.
Looking at the potential growth valuation of both JP Morgan and Credit Suisse I think the street is underestimating the longevity of the potential growth both, JP Morgan and Credit Suisse see a strong ramp-up to approximately $7, billion but then significantly curtail the growth rate for 2016 and even further for 2017. Given the lower sub churn and underlying momentum to the business due to the attraction of the company's Un-carrier program, we believe the growth (while not as large as 2015) will have staying power, growing EBITDA by double digits through 2018.
The next thing which I think is ignored by the street is integration of the MetroPCS business, which is well ahead of schedule. The company recently increased the expected synergies from $6-7 billion on an NPV basis, to $9-10 billion. Considering from mid-2013, the company began shifting the MetroPCS customers over to T-Mobile's network and by the fourth quarter of 2014, the company had moved 87% of the former MetroPCS customer base.
Management also hinted that they expect to hit a synergy run rate of at least$1.5 billion one year earlier, in 2016, versus the original 2017 plan. Another significant factor for EBITDA growth is the much decreased one-time costs for the MetroPCS conversion and integration. These extraordinary costs are now expected to be lower by $750 million to $1.05 billion - a massive sum. We believe some of these savings will be reallocated to additional spectrum purchases in 2015.Combining all the above factors I believe that company will witness the first free cash flow in the history of this year.
Valuation
I feel that T-Mobile is trading low at from its extreme value, holding this stock at this level is nice premium in to one’s portfolio. Looking at its EV/EBITDA the stock is trading at 6.2x which is a substantial discount to its peer group median average of 8.4x on a non trailing twelve months.
Looking at the multiple of revenue, the company is trading at 1.4x NTM EV/Rev, compared to 2.3x for both its larger competitors AT&T & Verizon. Even if we make an assumption that the company, through its continued transitional and subscriber growth, can achieve a valuation closer to 2.0x, still it is trading at a discount to VZ & AT&T, the price would be nearly 45% higher. But it doesn’t mean that their competitors doesn’t have any wire line which reduce their valuation both the large competitors have.
Coming to price target under a no-buyout scenario is a 6.7x multiple on $8.4 billion EBITDA for fiscal 2016, with a net debt balance of $20.7 billion, which forecasts another $1 billion of spectrum asset acquisitions for 2015. We think the levered free cash flow yield will eclipse 8.1%. At 6.7x, the target price under this valuation methodology would be $44 for the current year-end and nearly $52 for year-end 2016, for upside potential of 33% and 57%, respectively.
As seen above the JP Morgan and Credit susisse they were expecting the current ramp as a one-year phenomenon, which is not my analysis said. The street is expecting that their would be a single digit growth in 2016 of T-mobile and very low growth in 2017, but as per my analysis the growth would be around low but still remain at double digit and the above factors may lead to higher valuation.
Now from the prospective of FCF I expect that their would be a growth in FCF at least for the next two years, the company is likely to see a strong upside in the shares. Currently the stock is trading at 10x compared to its competitors Verizon is trading at 17.1x and AT&T trading at 14.7x and that’s all of 2017 FCF per share figure on taxable basis.
Now as per the DCF model with consistent fair growth of 7% and 6% for consecutive two years the valuation is at $46.71 which shows the variance of 37% from the 27 April closing price.
Disclosure:
I don't have any investment in the aforementioned stock, nor do I get paid from the aforementioned stock company to write, and I have no plans to invest in the stock for the next 72 hours.
The above details are taken from the company filings 10K and an article of author Alpha Gen Capital is considered while writing this article.
