T-Mobile Hoping the Third Time is the Charm for Earnings Report

T-Mobile (NASDAQ:TMUS) reports 2019 fourth-quarter earnings after the markets close on February 6. The company is hoping to break a string of two consecutive quarters in which the company has beaten on earnings but missed on revenues.

Analysts are forecasting earnings per share (EPS) of 84 cents with revenue of $11.82 billion. The EPS would represent a year-over-year increase of over 10%. The revenue would also be higher than the same period in 2018 ($11.82 billion vs. $11.44 billion).

T-Mobile Continues to Be the “Un”-Conventional Choice

T-Mobile gained prominence in the wireless sector with its strategy to be the “un-carrier”. The campaign, which was launched in 2013, gave consumers streamlined wireless plans with no contracts, subsidized phones, coverage fees for data and early termination fees.

But T-Mobile is also proving to be a preferred choice of businesses. The company recently received the top spot in the J.D. Power Customer Satisfaction Study for the third consecutive year. The study is a survey of three business segments: very small, small/medium, and enterprise. T-Mobile won in every category.

 TMUS Stock Has Been About as Steady as You Can Get

The TMUS stock price on January 4, 2013 was $9.73. As of this writing, investors would have to pay $82.98 for the privilege of owning one share. Seeing a share price increase by a factor of 10 suggests the company is doing a lot of things right. However, a closer look at the stock shows it for what it is, a “steady Eddie”. In the past year, the stock has grown 14%. That is ahead of Verizon (NYSE:VZ) but trails the S&P 500 and AT&T (NYSE:T). This is particularly noticeable because the like Verizon, AT&T offers a sizable dividend.

So far, investors haven’t seemed to care. For starters, TMUS has been considered the growth stock of the cellular network industry. So even with no dividend and a price-to-earnings premium, T-Mobile does not look overpriced.

One reason for this is that T-Mobile continues to be in the process of completing a merger with the number four carrier Sprint (NYSE:S). Industry experts acknowledge the merger will most likely be approved. However, it’s been two years and Sprint is becoming less attractive of a buy every day.

Why the merger matters and why it doesn’t?

T-Mobile, like every wireless carrier, is eagerly awaiting the nationwide rollout of a 5G network. And that’s where Sprint becomes valuable for T-Mobile. T-Mobile operates on a low-band, 5G spectrum. These networks have the advantage of being available over a longer distance, but they don’t deliver quite the same speeds as mid- and high-band spectrums. If you remember your high school physics, it’s similar to the difference between AM and FM radio waves. The AM signal may travel further, but the FM signal is stronger.

Sprint carries the mid-band spectrum. Thus a merger will give T-Mobile the ability to offer customers an overall better 5G experience.

However, it may be fair to say that Sprint needs the merger more than T-Mobile. In advance of the earnings report, the company gave analysts its preliminary full-year 2019 customer results. Those results showed an increase of 7 million net new customers. 1.9 million of those customers were added in the fourth quarter alone. And over 50% of its fourth-quarter customer additions were postpaid phone customers.

Is T-Mobile Stock a Buy?

If you expect the merger to go through, then I think the stock is a buy. If not, I may be inclined to wait a little bit. Here’s why. As I mentioned above, T-Mobile does not pay a dividend. Prior to the announced plans to merge with Sprint, the company had a generous stock buyback plan. Stock buybacks are one way, aside from dividends, that a company can add shareholder value.

And to be clear, T-Mobile has a clean balance sheet and a healthy free cash flow. In the first three quarters of 2019, the company reported $2.9 billion in free cash flow on $33.1 billion of revenue.

However, since the announcement of the planned merger, the company has been holding its powder to help pay for the merger. T-Mobile says it plans to spend $40 billion over three years to continue building out its 5G network. That’s not unique to T-Mobile. Every carrier is going to be spending massively on 5G infrastructure. However, if the Sprint merger falls through that cost may increase.

T-Mobile says it would resume its stock buybacks if the merger was to fall through, but the question for investors would be what does the long-term look like? AT&T, for example, is branching out into the streaming game. And while that may be a risk, it is providing an additional revenue stream.

The bottom line for me is this. Investors should expect a good earnings report, but the stock looks more attractive if the merger is approved.