Returns as of 03/04/2022
Returns as of 03/04/2022
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In a down morning for the market, with the Nasdaq Composite down about 2% on Wednesday as of this writing, T-Mobile ( TMUS -1.34% ) is defying gravity, up 10.5%.
T-Mobile’s stock had been beaten down in the latter half of 2021 due to competitive concerns across the industry, as well as concerns over its profitability coming out of the 2020 merger with Sprint. However, strong fourth-quarter net additions and a bright outlook for 2022 seemed to ease those fears.
Image source: Getty Images.
In the fourth quarter, T-Mobile recorded $20.79 billion in revenue and $0.34 per share. While revenue came in just short of expectations, the EPS figures came in better than expected. Total revenue might be skewed by heavily subsidized hardware sales, but service revenues were $15 billion, up a solid 6% over the prior year. Net post-paid phone additions were 844,000, and post-paid customers came in at a strong 1,750.
While the phone net add numbers came in slightly below the 884,000 reported by AT&T ( T 0.38% ), these numbers came in the face of elevated churn from the Sprint customer base, which T-Mobile management is transitioning off the Sprint network and over to T-Mobile. When a forced transition like that happens, some customers inevitably go over to competitors. However, that transition is expected to be complete by mid-2022.
Management provided color on the conference call with analysts, disclosing that T-Mobile actually led the industry in gross additions, even if elevated Sprint churn caused net additions to come in just below AT&T’s. Meanwhile, CEO Mike Sievert said that if the entire T-Mobile base churned at the level of its post-paid Magenta customers, net additions would have been 1.4 million — far and away outpacing competitors.
Perhaps more important than anything, investors seemed relieved at T-Mobile’s 2022 guidance, which was as follows:
Postpaid net customer additions
5,000 to 5,500
Core adjusted EBITDA
$25.6 billion to $26.1 billion
$13 billion to $13.5 billion
Free cash flow
$7.1 billion to $7.6 billion
Data source: T-Mobile Q4 earnings release.
That free cash flow number, though a solid improvement over 2021, actually came in a bit short of analyst guidance. However, there are a couple of caveats. T-Mobile is moving faster to integrate Sprint than it forecast, which is causing a pull-forward of merger-related costs, estimated to be between $4.5 billion and $5 billion in 2022, and also capital expenditures, which are coming in much higher than for 2021. Those merger-related costs are one-time, so the extra $5 billion or so should flow to the bottom line in 2023. In addition, capital expenditures are likely to moderate or even decline next year.
And of course, T-Mobile has nearly always guided conservatively, as management has beaten its initial subscriber guidance for eight years straight.
There has been a lot of fear of the future in T-Mobile’s stock recently, amid aggressive competitor promotions and the rise of cable companies offering mobile plans. However, T-Mobile is hitting its targets and projecting another good year, so it doesn’t seem to be sweating the competition yet.
While the cable companies are a new threat, T-Mobile still has a two-year lead in 5G deployment. And if those merger synergies and moderating capital expenditures flow to the bottom line next year, the company seems to be on track to meet or exceed the 2023 free cash flow guidance of $13 billion to $14 billion it gave at its investor day almost a year ago. If it hits those numbers, the stock is only trading around 10 times that 2023 free cash flow number, making it a cheap stock even after its nice rise today.
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*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 03/04/2022.
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