T-Mobile Analyst Sees Compelling Synergy, Operating Efficiencies Driving Growth, Capital Return

JP Morgan analyst Philip Cusick reiterates an Overweight rating on T-Mobile US, Inc TMUS and a $200 price target.
The analyst is lowering his postpaid phone net add estimate to 540k from 600k and upgrade rate to 3.8% from 4.2% on more moderate than expected 1Q customer activity. This ~8% Y/Y slowdown is still ahead of the overall industry, where he expects 1Q23 adds of 1.42 million, down 24% Y/Y despite strong cable growth.
He looks for a flat Q/Q 2Q23 postpaid phones before being seasonally higher in 3Q and 4Q and still estimates 2.5 million adds for the year and 7.4 million, for the industry, down 17% Y/Y.
At a competitor conference at the end of February, CFO Peter Osvaldik noted the company was seeing a significantly lower equipment upgrade rate than the industry because of everything it has from a value proposition and saw that playing into 2023. He expects equipment revenue to decline further versus 2022 and serve a net neutral to net negative flow for the company.
The analyst now models upgrade rates of 3.8% from 1Q23 through 3Q and then increases to 4.0% in 4Q23.
The analyst's 5.5 million total postpaid add estimate is unchanged, including 2.5 million phone adds, 1.9 million postpaid FWA adds, and 1.1 million other data device adds.
He maintains his 2023 EBITDA estimate of $28.9 billion vs. the guide of $28.7 billion -$29.2 billion and assumes $6.9 billion in 1Q23, which aligns with management commentary.
T-Mobile remains his favorite stock across his coverage as he sees substantial synergy and operating efficiencies driving strong EBITDA, cash flow growth, and significant capital return.
T-Mobile continues to execute its merger integration synergies and is building on its "value" brand with network quality and coverage improvements, including recent Ookla, OpenSignal, and Umlaut surveys that match the analyst's information via personal accounts that customers are happy with their T-Mobile service.
The steady march of postpaid phone adds, account growth, low churn, ARPU/APRA improvement, and higher service revenue and margins has led the company to enact a substantial buyback, which the analyst expects to accelerate through 2023.
The PF "core" EBITDA service margin in 2025 is still only ~50%, which still looks conservative relative to AT&T Inc T and Verizon Communications Inc VZ at ~55% despite a similar scale in revenue and subscribers.
Price Action: TMUS shares traded lower by 0.58% at $145.91 on the last check Tuesday.

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