Shares of T-Mobile US Inc (NYSE: TMUS) are set for a potential upside given the strong subscriber growth and underlying trends that are expected to emerge as the company nears completion of the re-pricing of its subscriber base.
Third quarter results from T-Mobile showed strength in postpaid subscriber growth with 648K net adds. With a second consecutive quarter of net customer additions, T-Mobile returned to postpaid subscriber growth after years of declines.
Following the move to Simple Choice and Value plans, T-Mobile should emerge as a faster-growing (albeit lower margin) carrier. However, this new threshold should enable the company to continue to take share from the larger providers, which are focusing on maintaining profitability.
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"We believe this approach is similar to what Softbank/Sprint will pursue as its network investments begin to bear fruit in late 2014. While we haven't made significant changes to our model, on our updated numbers, T-Mobile would be by far the fastest growing wireless operator among the Big 4 national carriers," UBS analyst John Hodulik wrote in a note to clients.
Despite this, it trades at the lowest EBITDA multiples for 2014 and 2015, suggesting that while many investors are on board, a fair amount of skepticism remains regarding the sustainability of the company's momentum.
However, investors' doubts should fade as the company improves its customer base and topline. Seasonality, the addition of tablets to the line-up, and an expected fourth quarter marketing push should enable net additions to remain strong in the fourth quarter.
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"Our estimates suggest T-Mo will have the fastest growing postpaid customer base among the Big 4 in 4Q," Hodulik noted.
Moreover, the market has seen the worst in terms of postpaid average revenue per user (ARPU) declines given expectations f! or a slowdown in incremental penetration of Value and Simple Choice plans.
Penetration of these plans reached 61 percent of the base at the end of the third quarter and management suggested they will reach 65-75 percent by year-end, eventually topping out at 85-90 percent.
"In 3Q, postpaid ARPU fell 7.8% (in-line) after dropping 6.5% in 2Q. We expect declines to moderate starting in 4Q, with postpaid ARPU bottoming in 2Q14 and growing sequentially in the second half of 2014," Hodulik said.
Prepaid is witnessing an uptrend as TMUS recorded better-than-expected prepaid subscriber results for the third quarter with 25K net adds.
"With the launch of 15 additional MetroPCS-branded prepaid markets this month, bringing the total to 30, we should see additional momentum in prepaid heading into 2014," Hodulik said.
Meanwhile, the company has largely completed deployment of LTE on its own AWS spectrum (10 MHz x 10 MHz). It has now turned its focus to deploying LTE on the 10 MHz x 10 MHz acquired from MetroPCS (currently used for both CDMA and LTE service).
The presence of LTE on a 20x20 MHz array will begin to differentiate T-Mobile's network in 2014. Investors may hear more about progress here—and the early recognition of synergies from the PCS deal—in the near future.
"The attractiveness of the Value and Simple Choice plans and the speeds of T-Mobile's network should lead to improving annual revenue trends in 2014. Margins should also benefit as the abnormally high upgrade rate of 9 percent begins to come down," Hodulik said.
The company maintained guidance for EBITDA of $5.2 billion - $5.4 billion this year, despite raising postpaid net add guidance to 1.6-1.8 million from 1.0-1.2 million previously.
T-Mobile shares are weak given management's commentary that it could file a shelf registration for new debt and equity securities soon. The company suggested it could issue debt or equity to purchase attractive spectrum were it to come to market at a reason! able pric! e. The shelf registration is needed for an optimistic spectrum purchases.
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The company's spectrum priorities include filling the gaps in its AWS holdings to enable deployment of a 20x20 MHz spectrum band across the top 100 U.S. markets and securing low-band spectrum to improve propagation and signal quality
Based on FCC filings, the company appears focused on the broadcast incentive auctions to fulfill its need for low-band spectrum and could pursue a number of smaller deals for AWS licenses. The company's investments in the network would support subscriber momentum.
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