Why Analysts Think M&A Might Be in the Cards for T-Mobile

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T-Mobile US Inc. (NASDAQ: TMUS) reported its fourth-quarter financial results before the markets opened on Tuesday. Investors responded positively to the results and analysts seemed to take the same approach as well. Although more analysts seem to think that mergers and acquisitions (M&A) might be on the horizon for this stock. T-Mobile

24/7 Wall St. has included some highlights from the earnings report, as well as what a few analysts are saying.

The company said that it had $0.45 in earnings per share (EPS) on $10.18 billion in revenue. Thomson Reuters consensus estimates had called for $0.29 in EPS and revenue of $9.84 billion. The same period of last year reportedly had EPS of $0.34 and $8.25 billion in revenue.

During the quarter, there were 2.1 million total net customer additions, bringing the total customer count to 71.5 million. For the 2016 full year, total net additions were 8.2 million, making this the third year in a row above 8 million.

Branded postpaid net additions were 1.2 million in the fourth quarter and 4.1 million in the full year, well above the full-year revised guidance calling for 3.7 million to 3.9 million postpaid net additions.

In terms of guidance for the 2017 full year, the company expects to see postpaid net additions in the range of 2.4 million to 3.4 million, with adjusted EBITDA between $10.4 billion and $10.8 billion. The consensus estimates are $1.83 in EPS and $40.37 billion in revenue for this year.

Merrill Lynch maintained an Underperform rating with a $29 price objective. Looking at the target, it seems way low here, but according to the firm these fourth-quarter results were largely in line with regard to financial metrics. The consensus is at the high end of initial 2017 guidance provided by the company. Also the stock is expensive on a free-cash-flow basis, adjusting for capital leases and other operational uses of cash.

Evercore ISI issued a call ahead of the earnings report with a Buy rating and a $72 price target. The firm sees robust organic growth and a company that is best positioned to benefit from M&A. The firm believes that T-Mobile has the best growth prospects in the space, driven by strong branding, product innovation and improved network performance and coverage. It’s also the most likely to benefit from sector consolidation or wireless M&A from outside the telecom sector, as it provides a potential acquirer the opportunity to add a business that is strong on a standalone basis and a digestible size.

Also ahead of the report, Deutsche Bank reiterated a Buy rating and raised its target to $68 from $62 because the price reflected higher M&A valuation. The firm sees a 35% probability-weight of M&A now assumes an $80 takeout value.

A few other analysts weighed in:

  • RBC has an Outperform rating and raised its price target to $69 from $67.
  • FBR reiterated a Market Perform rating with a $59 price target.
  • Jefferies has a Buy rating.
  • Instinet reiterated a Neutral rating with a $62 price target.

Shares of T-Mobile were last seen at $61.54 on Wednesday, with a consensus analyst price target of $63.88 and a 52-week trading range of $34.87 to $63.68.