By Jack Hough

Why is a phone company trading like a member of the Magnificent Seven? T-Mobile US stock is up 54% in a year and 694% over the past decade. That beats Amazon.com over the first time frame, Meta Platforms over the second, and Alphabet and Apple over both.

One theory doesn't pan out: that a 2020 merger between T-Mobile and Sprint turned the industry into a lazy and lucrative triopoly. But a couple of antitrust oopsies might have played a role. More recently, telecom has been feasting at cable's expense. T-Mobile's frothy stock price of 23 times this year's projected earnings might even be worth it, but parent Deutsche Telekom offers a cheaper way in.

Start with some merger history: A decade ago, Verizon Communications Communications and AT&T controlled a combined 72% of national cell service. T-Mobile and Sprint split the rest. T-Mobile was slowly gaining market share for two reasons. First, it was giving customers a better deal than the others, at the expense of its free cash flow, which was under $1 billion a year, versus $15 billion for AT&T and $21 billion for Verizon. Second, Sprint stunk, making it a market share donor.

The growth mismatch between T-Mobile and Sprint meant that T-Mobile was running low on wireless spectrum, whereas Sprint had plenty that it couldn't use. So in 2018, T-Mobile said it would buy Sprint for $26.5 billion. Antitrust regulators challenged the deal, and then relented in 2019, with one main condition: T-Mobile had to sell its Boost prepaid cellphone service and some spectrum to Dish to create a new, fourth industry competitor.

Enough time has gone by to make judgments about who stuck what to whom. Boost, now owned by EchoStar, remains a nonfactor. The U.S. industry is a triopoly. But it isn't a "cozy" one, according to a paper last year in the journal Regulation Magazine; it's competitive. The deal has resulted in "substantial improvement in consumer welfare," argue researchers at Clemson University and Technology Policy Institute, a think tank. T-Mobile has led on 5G deployment, making service faster. Adjusting for this service improvement, the real price of wireless service fell 15.3% over three years after the deal, versus a 9.8% decline over the three years prior.

If the deal had hurt competition, all industry participants would be enjoying the benefits. But since the April 2020 merger closing, T-Mobile stock has gained 191%, versus 15% for AT&T, and a 25% decline for Verizon.

T-Mobile is still thriving. On Jan. 29, the company reported record gross additions of postpaid accounts last year, along with record-low churn. It's no longer giving it away; free cash flow is running around $17 billion a year -- close to that of Verizon and AT&T. One reason for T-Mobile's success is that although the government failed to create a fourth rival, it succeeded too well in keeping Verizon and AT&T out of the bidding for that Sprint spectrum. The study authors calculate that T-Mobile paid no more than 65 cents per MHz-pop, a measurement that factors in radio frequency and population. Competitors buying spectrum elsewhere at auction had to cough up $1.10.

T-Mobile is focusing growth efforts in rural markets, as well as the 30% of top 100 markets where it remains underpenetrated. Business services, where it is a laggard but is growing quickly, are another priority. One of the sweetest growth opportunities is home broadband service. Cable companies, stung by customers canceling their television channel bundles, ratcheted up the price of high-speed internet to make up for lost revenue. Telecoms, flush with cash now that their 5G networks are built, have swooped in with broadband service of their own.

One service type is called fixed wireless, and involves using a cellphone signal for home broadband. The main appeal there for T-Mobile is that it can earn money on unused spectrum. The bigger long-term moneymaker is fiberoptic service. With prices up, and customer churn typically low, management reckons that internal rates of return on fiber are over 20%.

That provides T-Mobile with a profitable place to direct its now-hefty free cash flow. It has used joint ventures with regional players to get a jump on boosting its fiber footprint. J.P. Morgan predicts that T-Mobile will grow its share from 4% to 10% by 2030. Earnings are seen growing by double-digit percentages over the next five years, which could make the stock's premium valuation worth paying. But Deutsche Telekom, which owns a majority stake, offers a cheaper way to invest.

Deutsche Telekom shares are up more than 120% over the past five years, but earnings per share have risen just as fast, so shares still trade below 16 times earnings. Remarkably, J.P. Morgan counts only 10 large-cap European companies whose earnings are expected to grow at double-digit rates. Deutsche Telekom is one of them, even if the U.S. is driving its growth. The other nine companies trade at an average of 23 times earnings, just like T-Mobile. Deutsche Telekom's lower valuation leads JPM to conclude that its shares are headed 30% higher. They pay a 2% dividend.

Quick note on an overly complicated topic: Collateralized loan obligations only sound thermonuclear. Ones rated AAA and AA have never had a loss. There are exchange-traded funds for them now, like Janus Henderson AAA CLO. Last April, I laid out BofA's case that these are a better deal for yield hunters than pricey private credit. I should have known better.

Buyers of that Janus ETF have done fine. They've made 5.5%, which annualizes to just over 7%. But so much cash has sloshed in from investors seeking higher yields in fancy places that assets under management tripled last year to over $20 billion. Janus is suddenly the third-largest active fixed income ETF seller. That means that what I really should have told investors to buy is stock in Janus Henderson Group, which has returned 49% with dividends since then.

Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.

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February 07, 2025 21:30 ET (02:30 GMT)

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