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Stock Analyst Update

T-Mobile's Merger Attempt With Sprint More Likely

We believe shares are slightly undervalued after a solid third quarter as evidence shows merger talks are near.

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 T-Mobile (TMUS) U.S. reported another solid result in the third quarter, but the company didn’t hold its usual quarterly conference call. While the press release was full of more hyperbole than usual and CEO John Legere did provide a brief video blog, he missed an expanded opportunity to tout his company’s success and denigrate his competitors. We believe this is evidence of the validity of rumors regarding a merger with Sprint. This time, the rumors have lasted longer than usual, and we think the likelihood of a second attempt to merge is much higher than in the past. However, there are still significant regulatory hurdles. That said, we believe virtually all the value in this rumored merger would go to Sprint’s shareholders if the deal goes through near Sprint’s current stock price, as we think Sprint is trading at a level significantly higher than it is worth on a stand-alone basis. Hence, we are maintaining our fair value estimate and no-moat rating for T-Mobile. We believe T-Mobile’s shares are slightly undervalued.

The firm reported revenue growth of 8% year over year versus our full-year projection of 7.5%. T-Mobile continues to do a nice job of growing its customer base, adding 1.3 million subscribers, its 18th straight quarter of adding more than 1 million customers. However, as we’ve expected, the number of subscribers added is declining. We anticipate that this will continue, as Verizon and AT&T are fighting back with lower prices and all-you-can-eat bundles of their own. That said, we still expect T-Mobile to add subscribers faster than the other three operators through at least the end of 2018.

The firm’s greater scale is also helping it improve its margins, with a quarterly EBITDA margin of 27% versus our full-year projection of 26.7%. However, with the fourth quarter historically carrying a lower margin due to holiday incentives, we expect the full year to be in line with our projection.

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Allan C. Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.