Wells Fargo analysts on Monday bumped up T-Mobile’s stock rating to Outperform on expectations the Un-carrier will see a significant ramp in free cash flow in 2017 and 2018.
According to Wells Fargo, T-Mobile’s free cash flow is expected to grow at a compound annual growth rate of around 92 percent from 2016 to 2018. The result will be free cash flow figures that grow from $1 billion in 2016 to $2.6 billion in 2017 and $3.7 billion in 2018, Wells Fargo said.
“In our view, we are getting closer to an important “hockey stick” part of the free cash flow (FCF) generation ramp,” Wells Fargo senior analyst Jennifer Fritzsche wrote. “In addition to the FCF inflection point, we believe TMUS should also see continued positive momentum in subscriber (sub) growth and be helped by the M&A speculation factor post the Presidential election. We are not changing our model, but are raising our valuation range from $48-$50 to $52-$54.”
Fritzsche said the estimates assume T-Mobile will spend around $7 billion in the FCC’s ongoing spectrum auction, but noted T-Mobile is expected to generate nearly $3 of free cash flow per share even in a higher auction spending scenario of $8.3 billion.
Wells Fargo is predicting T-Mobile will add 5.9 million in total prepaid and postpaid customers in 2017, down from its 2016 estimate but still above estimates for all its carrier peers. Still, annual investments of around $200 million to modernize its IT infrastructure and migrate to could-based apps could help T-Mobile push its EBITDA margins “well beyond” the current 36 percent, Wells Fargo said.
But T-Mobile isn’t the only carrier that is well positioned.
Wells Fargo said Sprint remains its top carrier pick, and noted that like T-Mobile the carrier stands to gain a significant number of customers in a “post-iphone 7 world” thanks to a better network experience with three-channel carrier aggregation.
Fritzsche said recent porting trends show both T-Mobile and Sprint are “showing positive ports” against AT&T and Verizon. Sprint is expected to capitalize on this with pre- and postpaid customer additions of 1.98 million in 2016 and 2.61 million in 2017.
