After Failed Merger Talks, Continuing The T-Mobile Vs. Sprint Pair Trade

The highly competitive nature of the wireless carrier market in 2017 is expected to moderate in 2018, while the industry as a whole is also likely to benefit from a more favorable macro environment, according to KeyBanc Capital Markets. 

The Analyst

KeyBanc Capital Markets' Brandon Nispel maintains an Overweight rating on T-Mobile US Inc TMUS's stock with a price target boosted from $72 and $76. The analyst maintains an Underweight rating on Sprint Corp S's stock with a price target lowered from $5.50 to $5. 

The Thesis

A T-Mobile and Sprint merger is off the table, Nispel said. But a price war between mobile carriers is unlikely, he said in a research report. (See the analyst's track record here.)

The wireless industry will continue to be competitive on devices but "more muted" on data plan price competition, as the competition will focus on differentiation between the unlimited data plans, Nispel said. 

Between T-Mobile and Sprint, T-Mobile could experience continuation of service revenue growth even with flat average revenue per user, Nispel also said. On the other hand, Sprint's year-over-year ARPU comparison will likely be negatively impacted from a change in its insurance program, while its churn will also increase in 2018, he said. 

T-Mobile's 600MHz build is likely to create margin pressure, but its increased scale will result in an even greater positive impact to margins, the analyst said. On the other hand, Sprint's increased capital investments will pressure service gross margins, especially if its subscriber growth slows down, Nispel said. 

Price Action

Shares of T-Mobile gained 10 percent in 2017 while Sprint's stock lost 30 percent.

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