A new report from MoffettNathanson spells it out with no uncertain terms: T-Mobile is poised to grow, and that’s while acknowledging the omnipresence of the coronavirus.
“New T-Mobile is, in our view, a winner,” wrote long-time industry analyst Craig Moffett, noting the decision to set a price target of $125 for the stock. “We believe the new T-Mobile is the most compelling long in our combined Telecom/Cable/Satellite coverage universe.”
T-Mobile shares closed at $75.45 on Friday and were trading up about 2% at mid-day Eastern time today.
The report spells out how the coronavirus is so top of mind that it’s almost impossible to shift one’s perspective enough to even consider time horizons longer than the next six months, or however long the current social distancing lockdown lasts.
“But T-Mobile is a longer term story. Like all telecoms, it will be far less directly impacted by coronavirus than will the rest of the economy, so over the near term, it should be relatively defensive,” Moffett wrote. “But longer term, the T-Mobile story is about much more than playing defense. T-Mobile is poised to grow.”
The team of analysts at MoffettNathanson expect the T-Mobile/Sprint merger to close May 1, setting a host of forces into motion. Sprint’s churn rate will begin to fall, initially because there’s one less place for those customers to go, but customers soon will see improvements on the network side.
Sprint’s ARPU also will begin to fall, however, both because Sprint customers will gradually move onto T-Mobile’s lower priced plans and because T-Mobile also will have to acknowledge that Sprint is carrying some number of inactive lines that will be acknowledged and “written off.”
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Longer term, the New T-Mobile also will be undertaking the job of putting Sprint’s 2.5 GHz spectrum to work for 5G. “New T-Mobile will, in our view, enjoy a genuine advantage in network performance versus Verizon, which is overly dependent on millimeter wave spectrum (and therefore offers poor network coverage) and versus AT&T, which is, so far, overly dependent on low frequency spectrum (and therefore offers good coverage but uninspiring speeds). That advantage will help New T-Mobile with new customer acquisition in the retail market," the 40-page report said. "But perhaps more importantly, it will open the door for T-Mobile to finally compete in the enterprise (employer liable) market as well, where today they are little more than an afterthought.”
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Of course, things could go south for the New T-Mobile; the analysts spell out the downside in the requisite “Risks” section of the report, which notes the company’s “un-carrier” strategy could fail to deliver its expected improvements, leaving the company in a poor competitive position and unable to comfortably manage its debt load, among other potential outcomes.
Tunney Act review
While the analysts are mostly bullish on the New T-Mobile, they point out the last remaining hurdle for the merger is the Tunney Act review. The Tunney Act calls for a separate review of the Department of Justice (DoJ) remedy, and a decision by Judge Timothy Kelly was expected by the end of last year. However, in this case, it’s more complicated and all the more so because of COVID-19.
“That’s because Dish Network plays such a central role in the DOJ’s remedy,” the analysts wrote. “Dish Network isn’t looking so good these days. Dish’s shares have absolutely cratered in the coronavirus crisis.”
The collapse in Dish’s share price "may simply be a function of the market’s sudden distaste for risk (building a de novo network is the very risky proposition under the best of circumstances, and these aren’t the best of circumstances),” Moffett wrote. “Or it may be more dire even than that, given that Dish Network faces a near term debt maturity of $1.1B on May 1st, which comes on top of an additional $1.4B funding requirement for the purchase of Sprint’s pre-paid business.”
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They said it’s important to note that Dish does have $2.4 billion on hand, and its satellite business is still free cash flow positive. Among the lawyers with whom they’ve talked, none of them believes the Tunney Act will ultimately derail the transaction, so they're assuming it moves forward.
Zacks Equity Research noted that Dish shares have lost about 46.7% since the company’s last earnings report about a month ago.
Update: Dish confirmed to Fierce today that it remains committed to completing the buildout of its 5G network.