Description

Much has been written on this topic so I will stick to the basics.  This view is not a “variant perception” but I’ve never understood the concept because your perception doesn’t need to be variant, it just needs to be right. 

I am long T-Mobile US (TMUS) because it is an attractively priced levered free cash flow growth opportunity with a potential M&A kicker run by a highly competent management team.  At 20X $5.20+ of FCF per share in 2020 this is a $104+ stock. 

TMUS is a domestic wireless operator taking market share from incumbent players like AT&T, Verizon and Sprint due to a combination of a) improving network quality, b) attractively priced subscription plans and c) savvy marketing.  I expect TMUS to continue taking market share because a) they keep improving the network with spectrum acquisitions, small cells and other technologies, b) they continue to offer the most attractive subscription plans and c) the “un-carrier” marketing continues to resonate.  There are also new benefits such as a deep portfolio of nationwide low-band spectrum that will eliminate any remaining network superiority of T/VZ once deployed plus a rollout of distribution into new geographic locations where TMUS has high mind share but low market share (due to prior lack of distribution, spectrum, etc) which will drive gross subscriber additions without the drawback of churn on a legacy base.

TMUS has a cost advantage over primary rivals when considering capital structure cost.  AT&T and VZ are stuck charging premium prices for networks that are becoming less and less distinctive over time.  Reducing ARPU to TMUS levels would destroy their EBITDA and imperil dividends.  This is not a traditional cost advantage because the dividend policies can change.  However, the institutional imperative to hold the dividends sacrosanct is a huge strategic blunder and they won’t figure it out until it is too late. 

I do not believe cable’s entry into wireless will follow the European path.  The US has a different population density which is of course important for physical network operators.  The US cable players are regional.  Wi-Fi first is difficult to execute well.  C-RAN and other technology advances are not conducive to hybrid fiber coax back-haul (which is a small portion of the wireless operator cost anyhow).  Cable operators have poor brands and even worse distribution foot prints (think of the cable stores in some industrial park vs. the top tier shopping centers). 

TMUS is an attractive asset for several strategic suitors including DISH, S and CMCSA+CHTR.  Speculation is that a S/TMUS deal would produce $30b NPV cost savings which is roughly $33/TMUS share.  I have no view on M&A beyond the fact that it’s an incremental positive.

TMUS is very well run by a team with a history of punching above their weight and executing against operational and financial commitments.  

Catalyst

time + M&A