T-Mobile US, Inc. (TMUS) offers the potential for some serious upside based on its past P/E premium to earnings growth. However, current weakness in the market and its stock price could offer investors the opportunity to get in at a lower level.
RBC Capital analyst Jonathan Atkin believes investors could make 14.18% on T-Mobile in the next twelve-months. He upped his price target on the cellular service provider to $87 from $80. The move puts his price-tag in line with the consensus one-year target price of $87.58.
Taking his cue from TMUS’s second quarter financial checkup, Atkin says that T-Mobile should be able to continue to benefit from “subscriber momentum and churn improvement” as it expands its presence across businesses and government markets. He also believes the company can improve its network and grow its retail business without hammering the bottom line.
T-Mobile will look to build on RBC’s price target increase and their “incredible Q2 [second quarter] results.” Chief Executive Officer (CEO) John Legere told conference call listeners, “1.8 million total net customers joined the Un-carrier movement in Q2. That makes it a monumental 25 quarters in a row that we’ve had more than 1 million net adds per quarter.”
Legree added, “In Q2, we had an all-time record low branded postpaid phone churn of 0.78%, down 17 basis points year-over-year. Not only is this an all-time record low, we’re also beating AT&T for the third quarter in a row.”
T-Mobile is adding customers and keeping them. It all added up to record second quarter revenue of $10.97 billion and earnings-per-share of $1.09, topping the consensus view of $0.97.
Underneath the financial report hood, management was able to increase operating margins to 14.04% of revenue in the second quarter of 2019 versus 13.72% a year ago. That’s despite a 7% increase for Selling, General, and Administrative expenses.
The combination of more customers, higher retention rates, and increasing profit margins usually leads to good things for shareholders. Let’s examine T-Mobile’s recent valuation history to see if Atkin’s $87 is too hot, too cold, or just about right.
In the last five years, T-Mobile has traded with a lofty average price-to-earnings (P/E) ratio at 57 times earnings. Ears start popping at those elevations. Today, the company trades at 19.99 times its trailing twelve-months earnings per share (EPS), which is a touch higher than the five-year (P/E) low of 18.78.
During the last half-decade, the uncarrier averaged bottom line growth of 39.69%. Investors showed a willing to pay a premium of 51.17% for TMUS’ growth rate. Earnings are forecasted to increase by 19.75 in 2020 versus 2019’s outlook. If investors are willing to pay the same premium, then we can guesstimate a P/E of 29.86. Multiply that by anticipated profits of $4.73 per share and we get a potential price tag of $141.24. That is 85.38% higher than where the stock closed on August 5, 2019.
If the stock were to trade on par with projected earnings growth, then we arrive at a destination of $93.42 (19.75 x 4.74). While not nearly doubling your dough, a 22.61% gain is nothing to overlook.
Stock seers predict sales of $47.25 billion in 2020. Since August 2014, T-Mobile has typically traded at 1.18 times sales (P/S), which is considerably lower than today’s 1.5 times sales. At its average P/S ratio, TMUS would dip to $65.67. Using the median price-to-sales valuation of 1.24 gets T-Mobile’s price to $69. Atkin’s $87 target requires investors paying 1.57 times sales, just about where it is today.
Price history shows T-Mobile has been in an uptrend since May 2018 but has come under pressure since releasing it second quarter financials. August 5, 2019’s closing price of $76.19 puts the stock right on its bottom line of rising support. If sellers maintain control and push TMUS below $75 on the close, then it could dip to $68ish. It should find a great deal of support and attract buying at $65ish provided the overall market isn’t in correction mode.
The Play: On a historical P/E basis, T-Mobile US, Inc. (TMUS) appears to be attractive for long-term investors. However, its current technical picture shows the potential for weakness in the near-term and its historical P/S valuation could limit upside from today’s price. Patient investors might hold tight and look to enter the stock in the $65-$70 range.
