3 Reasons To Avoid T-Mobile
With new cases of the coronavirus spiking in the US and worldwide .
With the already historic unemployment levels and job losses in recent months .
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest today. And this number grows smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
This is a huge part of things.
But another huge part of this that few think of is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you achieve your retirement goals.
In recent articles I’ve shown you several stocks to avoid investing in…
- 1 Reason To Avoid Exxon
- 1 Reason To Avoid This 4.4% Dividend Payer
- 2 Reasons To Avoid Mastercard
- 1 Reason To Avoid Daimler
- 3 Reasons To Avoid Kinder Morgan And Its 8.3% Dividend
Today I want to show you another stock to avoid so you can continue growing your investment portfolio.
3 Reasons To Avoid T-Mobile
- It’s Got A Lot Of Debt
As of this writing T-Mobile (TMUS) is a $151 billion market cap company that’s one of the largest phone providers in the United States.
After its recent merger with Sprint, it now serves up to 87 million phone customers and owns 30% of the wireless phone market in the US.
And it’s got a lot of debt that doesn’t show up on first glance.
Its debt to equity ratio is a solid 1.34… I look to invest in companies that have debt to equity ratios below 1.
And as a percentage of its balance sheet, total liabilities make up only 66.4% of its balance sheet as of the most up to date info.
While both are high, they aren’t horrible… Especially compared to some recent companies I’ve told you to avoid like…
- 2 Reasons To Avoid General Motors
- 1 More Reason To Avoid American Airlines
- 1 More Reason To Avoid Burlington Stores
- 2 Reasons To Avoid Home Depot
- 2 Reasons To Avoid Lowes
This also illustrates why you must do more than just look at metrics before investing in a stock.
Because when you look at the actual numbers, they show a different story…
Its most recent quarterly data showed it has $11.1 billion in cash. Compared to $94.7 billion in total debt and capital leases.
This large debt is bad enough alone… But combine this with the fact that after the T-Mobile and Sprint merger completed it was supposed to have around $70 billion of debt.
The merger completed on April 1st, 2020 – and only 6 months later it has 35.3% more debt.
Yes, I know this is due to factors surrounding the coronavirus and T-Mobile wanting to raise as much cash as possible… But taking on $24.7 billion more in debt wasn’t the right answer.
I want to invest in safe stocks that will be around for decades to help me build wealth over the long term. This helps insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity.
T-Mobile has the opposite problem.
Another reason it took on more debt is because its profits and cash flows aren’t great.
This is reason #2 to avoid its stock.
2. It’s Not Producing Enough Profits and Cash Flow
In the most recent quarterly data T-Mobile is profitable on an operating income and net income basis. And its unprofitable on a free cash flow basis.
Its net income profitability margin in the trailing twelve months (TTM) period was 5.2%. Its operating profit margin was 10.6%. And its free cash flow to sales (FCF/Sales) margin in this same time was negative 3.8%.
EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.
You want these numbers as high as possible on the positive side because that means the company is generating profits and cash flow from its operations.
And if its doing this it can grow the business in a healthy way without taking on more debt.
For example, I look for operating and net profits above 10% on a consistent basis. And I look for FCF/Sales margins above 5% on a consistent basis.
T-Mobile’s operating profit margin is above my threshold… But the net income and free cash flow metrics are not.
These lower profits combined with a massive amount of debt are dangerous enough…
But there’s still another reason to avoid its stock.
3. It’s Overvalued
With T-Mobile an okay at best operating business you’d expect it not to be overvalued… But it is.
Its P/E is 46.5.
Its P/CF is 20.3.
And its forward P/E is 37.2.
On all these metrics I look to buy investments below 20 to consider buying them.
T-Mobile is well above these numbers which means its overvalued by a large amount.
And this means investing in its stock today gives you no margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning its stock in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
This lack of a margin of safety is the category T-Mobile falls into right now. Especially when you add in the huge debt and low profits.
These 3 things combined make investing in T-Mobile stock far too risky right now. And for these reasons I recommend you avoid its stock.
Click the links below to see the stocks we recommend to Depression Proof Your Portfolio and earn safe investment returns.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.