Deutsche Telekom: Cautiously Optimistic On Long-Term Growth Prospects

Apr. 26, 2022 6:27 PM ETDeutsche Telekom AG (DTEGF)VZ, TMUS2 Likes
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Summary

  • Deutsche Telekom has seen some consolidation in the past few months.
  • However, growth in postpaid mobile subscribers in the U.S. as well as continued growth in overall revenue is encouraging.
  • I am cautiously optimistic that Deutsche Telekom can see longer-term upside going forward.

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Investment Thesis

Deutsche Telekom AG (OTCQX:DTEGF) could see upside from here as a result of continued growth in revenues as well as a rise in postpaid mobile demand in the United States - which the company is in a good position to capitalize on as a result of its growing stake in T-Mobile.

In a previous article back in October, I made the argument that Deutsche Telekom has the potential to see significant long-term upside going forward, on the basis of a boost in U.S. revenues as a result of the Sprint merger, along with a strong cash position and higher growth across the Consumers segment.

We subsequently saw the stock take a short-term decline in the second half of 2021 before consolidating at a level of $18.26 at the time of writing.

investing.com

investing.com

The purpose of this article is to investigate whether Deutsche Telekom could have upside from a value perspective given the recent consolidation.

Background

Headquartered in Germany, Deutsche Telekom is the largest telecommunications provider in Europe by revenue.

With that being said, the company's continued expansion in the United States through its growing acquisition of T-Mobile US (TMUS) has been notable.

Across Germany, the company has a 99% LTE network coverage along with 14.5 million broadband connections across its fixed network.

Deutsche Telekom Company Presentation 2022

Deutsche Telekom Company Presentation 2022

In this regard, the company's European dominance along with its expanding reach across the United States makes Deutsche Telekom virtually unique among its competitors in having a strong presence across both Europe and North America.

Performance

When looking at Deutsche Telekom's recent balance sheet results, we can see that the company's cash to liabilities has been on a downward trend - lower than that seen in 2019 and 2020.

Deutsche Telekom AG: Annual Financial Statements and combined management report as of December 31, 2021

Deutsche Telekom AG: Annual Financial Statements and combined management report as of December 31, 2021

2019 2020 2021
Cash and cash equivalents 5393 12939 7617
Current and non-current financial liabilities 66349 107108 111466
Cash to liabilities 8.13% 12.08% 6.83%

Source: Cash and liabilities figures sourced from Deutsche Telekom AG 2021 Financial Statements. Cash to liabilities ratio calculated by author.

Deutsche Telekom expects that capital expenditure will remain high over the next few years, as the company upgrades its infrastructure to LTE and 5G standards, along with a continued roll-out of broadband infrastructure.

From this standpoint, while we can expect cash levels to be lower than previous years - investors might start getting concerned if the cash to liabilities ratio falls significantly lower. The company still needs to meet its short-term debt obligations and investors will increasingly demand to see cash growth in the future as evidence that the company's investments in upgrading its telecom infrastructure are paying off.

When looking at earnings per share performance - we see that while earnings per share still trades at slightly below that of 2017 levels - net revenue and profits are still up significantly.

Deutsche Telekom AG: Annual Financial Statements and combined management report as of December 31, 2021

Deutsche Telekom AG: Annual Financial Statements and combined management report as of December 31, 2021

When considering that earnings per share has been "adjusted for special factors," we can see that "Effects of de-consolidations, disposals and acquisitions" have resulted in a significant increase in costs, and net profit would be significantly higher if not for such special factors.

Deutsche Telekom AG: Annual Financial Statements and combined management report as of December 31, 2021

Deutsche Telekom AG: Annual Financial Statements and combined management report as of December 31, 2021

In particular, with Deutsche Telekom continuing to raise its stake in T-Mobile US in order to become majority shareholder, we can expect that special factors will also affect short-term net profit in 2022. However, with Deutsche Telekom using this acquisition to become one of the leading players in the U.S. telecommunications market, my view is that investors will be willing to tolerate lower net profit across the short to medium-term for as long as revenue and market share continues to show signs of clear growth.

Looking Forward

While Deutsche Telekom has had to invest significantly in upgrading its capital infrastructure, the company now has over 90% 5G coverage in Germany.

Moreover, while we have seen a drop in demand for contract mobile arrangements across Europe over the past five years, we see the opposite trend across the United States.

Deutsche Telekom 2021 results

Deutsche Telekom 2021 results

In this regard, the fact that Deutsche Telekom has been increasing its stake in T-Mobile is quite welcoming - should we continue to see a rise in demand across the U.S. for postpaid mobile services, then Deutsche Telekom is in a prime position to capitalize on that growing market through T-Mobile.

Risks

Of course, the company still faces risks in that a continued drop in contract demand across Europe could effectively erase gains across the U.S. market, and while postpaid demand showed growth up until 2020 - there has been somewhat stagnant growth in the past year.

For instance, higher inflation may make postpaid options less appealing than that of prepaid. Verizon (VZ), one of T-Mobile's major competitors in the United States, reported a loss of 36,000 postpaid phone subscribers for the first quarter of 2022. Should upcoming quarterly results for Deutsche Telekom show a similar drop, then this may make investors more apprehensive on the stock. Moreover, while we did see a spike in broadband interest over the past couple of years as a result of pandemic shutdowns - broadband interest may hit a significant plateau this year as consumers start travelling and getting on the move once again.

These risks notwithstanding, my overall view is that while the company has seen a rise in costs due to special factors - the main revenue streams for this business remain solid and we should expect to see this translate into significant earnings growth going forward.

Conclusion

To conclude, Deutsche Telekom has come under some growth pressure on the earnings front as a result of capital expenditures to expand its share in T-Mobile as well as upgrade its existing infrastructure.

However, I take the view that overall revenue continues to rise comfortably and further earnings growth going forward is plausible as the rise in postpaid customers across the United States continues to gather pace.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

This article was written by

Discount Fountain profile picture
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I am an independent investor with an interest in analyzing stocks across the consumer, finance, telecommunication, and travel sectors. As a data scientist, I also have a great interest in using data tools to better understand a company's financial position.Some examples include:- Aggregating quarterly churn and ARPU data for Deutsche Telekom (DTEGY) and analysing trends over time using SQL: https://seekingalpha.com/article/4516805-deutsche-telekom-growth-potential-remains- Building a Monte Carlo simulation in Python to analyze loss ratios for Zurich Insurance Group (ZURVY): https://seekingalpha.com/article/4459821-zurich-insurance-stock-solid-insurance-company-still-faces-risks- Examining ADR and RevPAR trends by brand for Hilton Worldwide Holdings (HLT) using SQL: https://seekingalpha.com/article/4517248-hilton-worldwide-holdings-an-analysis-of-adr-and-revpar-trendsDisclaimer: All of the author's articles are written on an "as is" basis and without warranty. They represent the author's opinion only and in no way constitute professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions. The author disclaims all liability for any actions taken based on the information contained in any articles published.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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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Additional disclosure: This article is written on an "as is" basis and without warranty. The content represents my opinion only and in no way constitutes professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions. The author disclaims all liability for any actions taken based on the information contained in this article.

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