T-Mobile May Reflect M&A Upside, But Sustained Competition Merits A Deutsche Bank Downgrade

While shares of T-Mobile US Inc TMUS already reflect upside from M&A scenarios, competition in U.S. Wireless is intensifying, Deutsche Bank’s Matthew Niknam said in a report. He downgraded the rating for the company from Buy to Hold, while raising the price target from EUR1.96 to EUR2.00.

The current consensus estimates and share price already incorporate “many of the positive catalysts [...] while under-estimating downside risks,” Niknam commented.

Industry Headwinds

The first quarter of 2017 was not a healthy one for U.S. wireless, and industry headwinds impacted T-Mobile as well. While maintaining the first-quarter estimates for volume and average revenue per user, the analyst noted that the expected growth “came at a greater cost,” impacting the company’s margins.

“To be clear, we still expect TMUS to exceed its postpaid net add guidance and meet 2017 EBITDA targets; but, we think pricing sees increasing pressure going forward, and expect slowing service revenue growth ahead,” Niknam wrote.

Describing the intensifying competition, the analyst enumerated the following:

• The willingness of Verizon Communications Inc. VZ and AT&T Inc. T to sustain their unlimited plans and use more aggressive means to maintain market share.
• Continued activity from Sprint Corp S, which has a “deeper spectrum position to compete for the long-haul.”
• Rising threats from newer Cable mobile virtual network operator.

Positives Known

T-Mobile has the ability to become the dominant player in the industry and grow its free cash flow at a ~50 percent CAGR through 2019. Niknam noted, however, that the market already understood these positives.

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