Gabelli Research Analyst Sergey Dluzhevskiy discusses his best idea for 2018, T-Mobile US, Inc. (TMUS) (1-25-2018)
We are recommending T-Mobile US as our best idea for 2018.
T-Mobile US, 62%-owned by Deutsche Telekom, is the third-largest wireless operator in the United States, serving over 72 million customers.
The company has 864 million shares outstanding, trading at $63.76, for an equity market cap of $55 billion. Net debt is $30 billion.
We view T-Mobile as a unique asset in the wireless industry, with strong operating momentum, rapidly improving free cash flow, and significant strategic optionality.
In early January, the company pre-announced stronger than expected 4Q postpaid customer additions, marking the 16th consecutive quarter that T-Mobile has led the industry in postpaid phone net adds.
We expect its strong operating momentum to continue in 2018, as T-Mobile enhances low-band network coverage, expands distribution footprint, and continues to capitalize on its innovative Uncarrier sales and marketing initiatives.
Increasing scale, reduced churn, and synergies from MetroPCS deal have contributed to margin expansion and significant improvement in free cash flow that should further ramp up over the next few years.
T-Mobile is guiding to 45 to 48% 3-year FCF CAGR for 2016 to 2019.
In December, the company announced a $1.5 billion dollars stock repurchase program.
We expect T-Mobile to generate north of $4 billion in free cash flow in 2018, which could translate into larger stock buybacks after the current program is completed.
While deal negotiations with Sprint ended in November, as the parties were unable to find mutually agreeable terms, we expect the companies to revisit a potential combination in 6 to 12 months.
A merger of #3 and #4 US mobile operators is simply too synergy-rich not to try it again.
With that said, T-Mobile has a variety of strategic options to consider.
As communications sector continues to consolidate, T-Mobile could become a merger partner for cable operators, DISH Network, or technology companies.