Investment research firms MoffettNathanson and Barclays expect T-Mobile's (NYSE:TMUS) momentum to continue despite the concerns of some investors, the companies said in separate research notes.
Both firms noted a recent spike in T-Mobile's bad debt expense, but MoffettNathanson's Craig Moffett noted that debt stems from larger write-downs associated with higher-end phones rather than an increasing frequency of hardware write-downs.
"This distinction is critical," Moffett explained. "It is the frequency, not the size, of write-downs that is a leading indicator of churn. If frequency is not rising, neither is the risk of higher churn (indeed, we expect TMUS to beat on churn in Q4).
"A recent pullback in T-Mobile shares presents a compelling buying opportunity for a company that we expect will once again exceed expectations for growth," Moffett continued. "And this time, we also expect them to exceed expectations for free cash flow and profitability."
Barclays echoed Moffett's optimistic outlook on T-Mobile's future churn, adding that T-Mobile's aggressive promotions and its push into new suburban and rural markets should help it continue to grow its subscriber base. And the market share of the nation's third-largest carrier is likely to increase as Verizon and AT&T focus on high-end mobile users.
"We expect ARPU trends to remain relatively stable (higher data bucket adoption somewhat impacted by higher family plan penetration) as year-over-year churn improves and bad debt expense gradually gets better through more proactive initiatives from management," according to Barclay's, which maintained its "Overweight" rating for T-Mobile. "With questions on its capital strategy and bad debt expense subsiding, a refocus on T-Mobile's steady share gain, margin expansion, and improving free cash flow story are likely to reflect positively on the carrier's shares."
MoffettNathanson's outlook for Sprint (NYSE: S) wasn't nearly as rosy, however. The firm noted "the accounting distortions that have obscured the urgency of Sprint's cash burn and the severity of the erosion in its fundamentals," adding that the risk of bankruptcy "is still very real."
MoffettNathanson added that its target price of $2 for Sprint "is arguably excessively generous; a good case can be made that there is simply no reasonable methodology that leaves any room for equity value above zero."
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