Shares of T-Mobile US have been among the few standouts in a messy 2022 for the broader market. Matt Lockridge, a portfolio manager at Westwood Holdings Group, thinks shares still have plenty of room to run.
Lockridge, who co-manages the Westwood Quality Value Fund (ticker: WHGLX), calls T-Mobile (TMUS) a reasonably priced large-cap stock with an attractive price and a powerful catalyst on the horizon.
The stock, accounting for 1.88% of the $261 million fund as of Dec. 31, 2021, is up 11% year to date, compared to the S&P 500 index’s 3.2% decline. It’s trading at 21.1 times consensus earnings estimates for 2023, compared to a five-year average multiple of 28.04 times, according to FactSet.
The company’s shares rallied last month, after the company’s fourth-quarter earnings results and outlook came in ahead of expectations. Lockridge sees T-Mobile as a best-in-class 5G network, from the standpoint of both performance and coverage. He thinks the company will be able to gain share with subscribers in a sustainable manner.
Lockridge thinks the stock will benefit as the company unlocks synergies from its merger with Sprint and returns capital to shareholders in the coming years. Management has suggested improving cash flow postmerger would open the door to a potential $60 billion in share repurchases from 2023 to 2025. Lockridge calls that a “massive capital return” when compared to T-Mobile’s market capitalization, which recently hit $160 billion.
“The core business looks to be performing well, with visible earnings growth from synergies, and now I think the street will start looking forward toward this massive capital return,” Lockridge says. “We’re not baking in significant multiple expansion—it’s just the underlying earnings growth is going to ramp up as they retire shares and the core business grows as expected.”
Lockridge expects the company to exit 2022 with a run rate of $5 billion in cost synergies, making progress on a long-term goal of $7.5 billion a year. He thinks synergies, as well as a declining need for capital spending in the next couple of years will help drive the improving cash flow.
“As we get through this year, and their debt level gets down below two and a half times [net debt to earnings before interest, taxes, depreciation, and amortization], that’s when the door opens to capital return,” he says. “They’re saying that’ll start in 2023 but we think it could start even earlier.”
Write to Connor Smith at [email protected]
Credit: www.marketwatch.com /