T-Mobile: Why You Should Keep Your Free 'Stock Up' Shares

| About: T-Mobile US, (TMUS)

Summary

T-Mobile's new "Stock Up" customer appreciation program is giving away free T-Mobile shares.

Investors may want to keep the share after it is redeemed.

The telecom sector is facing many unique risks; however, T-Mobile appears positioned to do well in the future.

T-Mobile (NASDAQ:TMUS) recently announced a new set of customer appreciation initiatives including "Stock Up" and "T-Mobile Tuesdays." The Stock Up program seeks to give each T-Mobile account holder a free share of T-Mobile stock. While this may seem gimmicky to SA readers, it provides investment savvy T-Mobile users with an opportunity to cash in on a share of the stock and also an opportunity for all investors to give the stock consideration. T-Mobile investors should be aware of the unique risks facing the telecom sector and how these risks may negatively affect T-Mobile or play to its advantage as the "Un-Carrier." What holders of this share do with it after they redeem it is up to them; however, I believe that it may be a good hold.

How to Redeem Your Free T-Mobile Share(s):

T-Mobile is offering a single share of TMUS stock to every T-Mobile primary account holder. No matter how many lines are attached to the account (ex: a 4 line family plan), the primary account holder still only gets a single share. This being said, the primary account holder can earn another share (up to 100 per year) for referrals. Fair warning: redeeming the share is a somewhat tedious process. Click to enlarge

First, the T-Mobile customer must download the "T-Mobile Tuesdays" app from the Apple app store or Google play store. Next, the customer will need to sign in using the primary account holder's number. Then, the stock offer will be in the "my stuff" folder within the app. Claimants will then need to create a new brokerage account on the free trading platform Loyal3. Be aware that, while this process was not as laborious as creating an account with the normal brokerage, it requires much of the same information. Also note that the TMUS stock must be claimed by June 21st. Supposedly, this share will be deposited into the Loyal3 account within two weeks after the claim is completed. Even if a T-Mobile user chooses not to redeem their TMUS share, the T-mobile Tuesdays app sounds like it will be a rewarding download and excellent customer appreciation tool: "The Un-carrier will unveil a surprise 'thank you' for customers with a new partner each week. Gifts like free movie tickets, free gift cards, free subscriptions, free ride-sharing and more." - T-Mobile U.S.

T-Mobile is not creating new stock for this campaign but rather purchasing existing shares for claimants.

Risks Facing the Telecom Sector:

Once an investor has their free TMUS share, the investor should be aware of the many unique risks now facing the telecom sector. Brad Sorenson of Charles Schwab places an underperform rating on the telecom sector as a whole because of three key risks: rising expenses, heavy debt loads, and falling profits. Sorenson believes that the sector's wireless growth is both its biggest strength and weakness.

Sorenson notes that wireless growth has increased expenses for providers due to a need to upgrade equipment and pay for the related labor to do so. AT&T's recent tests of 5G towers should serve as a reminder that this technology will eventually be rolled out. According to CNET, standards for the technology will be established by 2020; however, wireless companies are and will be spending significant money on 5G developments. Compounding this issue is Garner's forecast which predicts that "connected devices" across the world will increase from 6.4 billion devices in 2016 to 20.8 billion devices in 2020. It must be noted that this figure includes the "Internet of Things" (including connected light bulbs) which utilize WIFI connections.

Sorenson also highlights that the telecom sector has taken on tremendous amounts of debt to finance infrastructure improvements. As a result, the telecom sector now has the highest debt / equity ratio of any non financial sector. Sorenson notes that this could be problematic for the sector when interest rates go up.

Finally, Sorenson notes that while there has been a tremendous increase in wireless demand, there has been a significant decrease in pricing power and profits for wireless carriers over the past few years. This is due to increasing pricing competition between wireless carriers and budget conscious consumers who are beginning to favor less expensive and contract free wireless plans. Clearly, an investor seeking exposure to telecoms must acknowledge the significant risks that the sector faces.

Investors May Want to Hold their T-Mobile Shares:

Despite the risks outlined for the telecom sector as a whole including rising expenses, heavy debt loads, and falling profits, T-Mobile investors may want to hold their shares rather than immediately liquidate them. I believe that T-Mobile is in a unique position to profit from the risks facing the telecom industry; however, with the price of the stock being somewhat high in comparison to its competition, it may not necessarily be a stock that everyone should buy.

As Sorenson notes, wireless customers are becoming increasingly budget conscious and are beginning to favor less expensive and contract free plans. T-Mobile's current business model is based on capturing these budget conscious customers who will see that AT&T (NYSE:T) and Verizon's (NYSE:VZ) plans are more expensive across the board. T-Mobile also no longer offers contract / subsidized wireless plans. Rather, customers pay a certain rate per month and have the option to bring their own phone to the plan, purchase a phone, or finance a phone through T-Mobile. Plans start at $50 per month per line with additional add-ons for more 4g data. Metro PCS undercuts T-Mobile with a contract free, $30 per month per line plan; however, Metro does not offer Apple's (NASDAQ:AAPL) popular iPhone through their stores or website, whereas T-Mobile does offer the iPhone.

Standard and Poor's currently has a "Buy" rating on AT&T with a $42 12 month price target and a "Hold" rating on Verizon with a $51 12 month price target. Angelo Zino of S&P highlights that wireless growth for both companies will be constrained because of consumer sentiment shift towards value service providers; however, both will continue to have profitable wireline businesses. T-Mobile does not have a wireline business to fall back on; however, Consumer Reports notes that, among the "big 4" wireless providers, T-Mobile receives the highest customer satisfaction scores. Excellent service, combined with low prices, could mean that T-Mobile is in a unique position to capture and profit from a larger portion of the 14.4 billion devices that will be connected between now and 2020 and beyond than the other big 4 wireless carriers. Zino seconds this opinion and believes that T-Mobile's contract free and no subsidy model will allow it to see wireless share gains. S&P currently has a "Hold" rating on T-Mobile with a $45 price 12 month price target.

Furthermore, T-Mobile has a similar debt equity ratio to AT&T and a much lower debt equity ratio compared to Verizon. The following chart shows T-Mobile, AT&T, and Verizon's total debt to equity ratio from 2011 to 2015.

Graphically, the same chart is displayed below:

Click to enlargeAs is shown, in 2015, AT&T had the lowest debt equity ratio of the group of 1.03; however, T-Mobile's was not much higher at 1.59. It should be noted that T-Mobile's ratio has been relatively steady over the past few years, whereas AT&T's has been steadily climbing. In sharp contrast, Verizon's debt equity ratio has swollen over the past few years to 6.71 in 2015. Sorenson is correct in pointing out that swelling debt among telecom companies is a problem going forward; however, T-Mobile appears to be keeping their borrowing under control.

With all of these points considered, I believe that T-Mobile may be an excellent hold; however, it may not represent the best value purchase due to its stock price being much higher than its competition. Verizon has the lowest PE ratio of 11.68 and a forward PE of 13.10. AT&T has a higher PE ratio of 17.03 but a forward PE of 13.91. In comparison T-Mobile has a high PE of 29.87 with an even higher forward PE of 34.17.

For easy reference, below is a chart showing a 1 year comparison of stock prices for T-Mobile, AT&T, and Verizon: Click to enlarge- Google Finance

Below is a 5 year comparison: Click to enlarge- Google Finance

Investor Takeaway:

Despite the risks outlined for the telecom sector as a whole including rising expenses, heavy debt loads, and falling profits, T-Mobile investors may want to hold their shares whether acquired traditionally or through the "stock up" program. I believe that T-Mobile is in a unique position to profit from the risks facing the telecom industry because of its positioning as the "un-carrier," high customer satisfaction, and low debt / equity ratio. However, with the price of the stock being somewhat high in comparison to its competition, it may be a better hold and is not necessarily a stock that everyone should buy.

Finally, just an interesting thought. T-Mobile may be a fun short-term play for the next few weeks if T-Mobile is currently purchasing shares for its "stock up" claimants. Buried deep in the "stock up" prospectus is the following info: "Open Market. Share purchases in the open market for the Initial Offer will generally occur on a daily basis on the first regular trading day following approval of the account by LOYAL3 (or on the next trading day if the market is not open), which normally takes four or more business days after your order is entered, but may be longer. You will receive an electronic redemption confirmation upon deposit of the Share into your LOYAL3 account." This appears to say that the stock was not purchased before the "stock up" promotion was announced and will be effectuated as claims come in. With over 11 million eligible accounts for the "stock up" program, this could increase trade volume over the next few weeks and prop up the stock if it dips. On the other hand it may not have much of an effect on stock price, considering that many may choose not to participate in the program or may immediately liquidate their share.

Disclosure: I am/we are long VOO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.