T-Mobile: Strained Valuation

| About: T-Mobile US, (TMUS)
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Summary

T-Mobile again reported sector-leading subscriber metrics during Q2.

The wireless company saw no benefit to the bottom line from growing subscribers over the last year.

The stock valuation is very strained based on the inability to grow income.

T-Mobile (NASDAQ:TMUS) continues to report record headline numbers, but not so great bottom line numbers. The domestic wireless company has become a marketing machine, but the costs to gain customers and grow revenues doesn't exactly reward shareholders.

The company again led the industry in post-paid phone additions that helped grow service revenues. At 12.1% service revenue growth, T-Mobile is actually outshining the sector by a mile where the other players are seeing losses.

Source: T-Mobile Q216 investor factbook

The problem, though, is that an investment is only valuable if the growth in revenues exceeds the costs to add those additional revenue. While T-Mobile is making progress on some of the cost fronts such as cost of services and selling, general and administrative, the more hidden other costs like depreciation and interest expense are cutting into all of the potential profit gains.

Similar to the rest of the industry, T-Mobile likes to point investors to the EBITDA metric, but this metric excludes these crucial parts of the investment theme. Depreciation is a massively important metric for wireless companies because that is where the cost of building the network hits the income statement. In addition, interest expenses are another place where the debt taken on to build the network and buy spectrum impacts the financials.

In fact, the wireless company specifically blames interest expense for the flat to down Q2 net income. Not only did interest expense grow by $111 million over last Q2, but also the interest income decreased by $46 million. The net effect was a $157 million reduction to income.

For this reason combined with soaring depreciation costs, the net income has made no improvement in the last year. Even the Q1 numbers had the benefit of a one-time gain that once excluded nearly wipes out all of the reported income for that quarter.

Source: T-Mobile Q216 investor factbook

The key investor takeaway is that with the stock trading above $45 and earning only $0.25 in the last quarter, T-Mobile is an expensive stock. The market likes to focus on EBITDA numbers, but that is a dangerous way to invest in the wireless space where depreciation and interest expenses are huge keys to financial health.

The recommendation is to continue admiring the marketing machine of the new CEO, but not so much the valuation of the stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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