T-Mobile US Inc. (TMUS) Earnings Analysis - Buy or Sell?

Telecom giant T-Mobile US, Inc. (TMUS) reported mixed third-quarter results on October 25. Its adjusted EPS comfortably beat analyst estimates, but its revenue missed the consensus estimate.

In this piece, I have discussed why waiting for an opportune entry point in TMUS could be wise.

The company’s third-quarter EPS came 5.7% above analyst estimates, while its revenue missed the consensus estimate by 0.6%. The company has a solid earnings history, having beaten the consensus estimates in the trailing four quarters.

During the quarter, the Bellevue, Washington-based mobile communications services provider added 850,000 postpaid phone connections, majorly contributing to its profits. This figure was higher than the Wall Street expectations of 773,000 connections.

The company also reported that 300 million Americans were now covered by Ultra Capacity 5G, achieving the target more than two months ahead of the year-end target. Its postpaid phone churn was 0.87%, a record low for the third quarter. Its postpaid net account additions decreased 2% year-over-year to come in at 386 thousand.

However, its prepaid net customer additions declined 24.8% year-over-year to 79 thousand. Moreover, the prepaid ARPU declined to $38.18, compared to $38.86 in the prior-year quarter.

TMUS’ CEO Mike Sievert said, “This quarter’s best-in-class customer and financial growth, including our industry-leading postpaid net customer and account adds and highest cash flow in Un-carrier history, paint a clear picture of a durable and differentiated strategy that is working.”

“Our unmatched offering is bringing more and more consumers and businesses to the Un-carrier, including, for the first time ever, the highest share of postpaid switches in smaller markets and rural areas. At the same time, we’re delivering significant shareholder value that will propel us into a future where we have plenty of room to run,” he added.

For fiscal 2023, the company raised its postpaid net customer additions from between 5.6 million and 5.9 million to 5.7 million and 5.9 million. Its core adjusted EBITDA is expected to come between $29 billion and $29.2 billion, higher than the previous guidance of between $28.9 billion and $29.2 billion.

Additionally, its adjusted free cash flow, including payments for merger-related costs, is expected to be between $13.4 billion and $13.6 billion, an increase from the prior guidance of between $13.2 billion and $13.6 billion.

TMUS’ stock has declined 3.9% over the past nine months but gained 2% year-to-date to close the last trading session at $142.86.

Here’s what could influence TMUS’ performance in the upcoming months:

Mixed Fundamentals

TMUS’ total revenues for the third quarter ended September 30, 2023, declined 1.2% year-over-year to $19.25 billion but increased 0.3% sequentially.

On the other hand, its net income increased 321.7% over the prior-year quarter to $2.14 billion. The company’s adjusted EBITDA rose 8% year-over-year to $7.60 billion. Its core adjusted EBITDA increased 12.2% year-over-year to $7.55 billion. Also, its adjusted free cash flow rose 93.8% year-over-year to $4 billion. In addition, its EPS came in at $1.82, representing an increase of 355% year-over-year.

Mixed Analyst Estimates

Analysts expect TMUS’ EPS for fiscal 2023 to increase 14.5% year-over-year to $7.64. However, its revenue for fiscal 2023 is expected to decline 1.7% year-over-year to $78.22 billion. Its EPS and revenue for fiscal 2024 are expected to increase 33% and 3.4% year-over-year to $10.17 and $80.88 billion, respectively.

Mixed Valuation

In terms of forward non-GAAP PEG, TMUS’ 0.32x is 78.9% lower than the 1.53x industry average.

On the other hand, in terms of forward EV/EBITDA, TMUS’ 9.31x is 17.5% higher than the 7.93x industry average. Its 3.50x forward EV/Sales is 104.9% higher than the 1.71x industry average. Likewise, its 18.80x forward EV/EBIT is 25.7% higher than the 14.96x industry average.

Mixed Profitability

In terms of the trailing-12-month net income margin, TMUS’ 9.93% is 180.8% higher than the 3.54% industry average. Likewise, its 35.31% trailing-12-month EBITDA margin is 93.2% higher than the 18.28% industry average. Its 62.20% trailing-12-month gross profit margin is 27.2% higher than the 48.90% industry average.

On the other hand, TMUS’ 0.37x trailing-12-month asset turnover ratio is 22.6% lower than the 0.48x industry average.

POWR Ratings Reflect Uncertainty

TMUS has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TMUS has a C grade for Quality, consistent with its mixed profitability. Its mixed analyst estimates justify its C grade for Sentiment.

TMUS is ranked #6 out of 18 stocks in the Telecom – Domestic industry. Click here to access TMUS’ Growth, Value, Momentum, and Stability ratings.

Bottom Line

The better-than-expected postpaid phone customer additions helped the company beat analysts’ earnings estimates comfortably. The company also raised the lower-end guidance for fiscal 2023’s EBITDA and net postpaid customer additions. However, declining revenues from equipment sales and prepaid services put pressure on revenue growth in the third quarter.

With student loan payments resuming, inflation still ubiquitous, and interest rates expected to remain higher for longer, TMUS’ customers could struggle with tighter pockets that could delay or default payments. Given its mixed fundamentals, analyst estimates, and profitability, it could be wise to wait for an opportune entry point in the stock.

How Does T-Mobile US, Inc. (TMUS) Stack Up Against Its Peers?

TMUS has an overall POWR Rating of C, equating to a Neutral rating. You may check out these A and B-rated stocks within the Telecom – Domestic industry: Ooma, Inc. (OOMA), Spok Holdings, Inc. (SPOK), and Verizon Communications Inc. (VZ). For exploring more buy-rated Telecom - Domestic stocks, click here.

What To Do Next?

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TMUS shares were trading at $140.74 per share on Friday morning, down $2.12 (-1.48%). Year-to-date, TMUS has gained 0.53%, versus a 9.28% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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