Should You Still Avoid T-Mobile After It Surpasses 100 Million Customers?
Back In October I showed you 3 Reasons To Avoid T-Mobile to protect your retirement portfolio…
Today, I answer the question – Should You Still Avoid T-Mobile After Strong Earnings?
Below is a brief recap of what I said in October about avoiding its stock. If you want to read the previous articles in full, use the links above.
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…
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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.
This is reason #2 to avoid its stock.
2. 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.
This thesis to avoid T-Mobile continued playing out after it released its most up to date quarterly earnings on November 5th, 2020.
- It surpassed 100 million total customers for the first time.
- Total revenues increased 74.2% in the year to year quarterly period to $19.3 billion.
- And net income rose 44% in the year to year quarterly period to $1.3 billion.
These are fantastic… But they also don’t show the full story.
Most of these increases are from its merger with Sprint.
And because of all the costs related to the merger like integrations, firings, redundancies, etc.; free cash flow fell 69% in the year to year quarterly period to $352 million.
Free cash flow is the truest profit a company produces because its after all costs. And this cratered in the quarter.
Companies aren’t valued over the long term by increases in revenues – at least they shouldn’t be… They’re valued based on their free cash flow production now and what’s expected in the future.
And this is a horrific drop in free cash flow.
Why did its cash flow fall so much?
In large part due to costs rising related to the merger as mentioned above… But more specifically due to the massive increase in its debt load since the third quarter of 2019.
In Q3 2019 it had total debts and capital leases of $26.73 billion.
Now it has $99.5 billion.
And its still massively overvalued too…
Its P/E is now 48.7.
Its P/CF is 20.4.
And its forward P/E is 34.4.
For these reasons in this article – and those in the last one – continue avoiding T-Mobile stock… Because owning it is enormously risky right now.
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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.