A Wall Street Analyst Says Buy T-Mobile Stock, Sell AT&T, and Hold Verizon. Here’s Why.

Luebchow’s top pick in the sector is T-Mobile (ticker: TMUS), which he rates at the equivalent of Buy. He expects a wireless spectrum portfolio advantage and value pricing to boost the company’s market share, closing the gap with the larger AT&T (T) and Verizon (VZ). Add the faster-than-forecast realization of cost savings from its recent merger with Sprint, and T-Mobile stands to lead the industry in earnings and free cash flow growth in the coming years.

“By almost any financial metric, TMUS is really the only growth story in the relatively mature wireless space,” Luebchow writes. He has a $150 price target for T-Mobile stock, about 13% above its recent $130.

Verizon’s path to future sales growth, meanwhile, will come not from increasing its subscriber base, but from convincing its existing customers to upgrade to more expensive plans, Luebchow expects. Management recently said that about 60% of Verizon subscribers weren’t on unlimited plans, and Luebchow estimates that less than 10% are on the highest-tier unlimited plan.

Verizon had the lead in the shift to 4G LTE networks a decade ago, but it lags behind in 5G, Luebchow writes. The company will need to be a big spender at the coming C-Band auction to acquire coveted mid-band spectrum, which offers an attractive trade-off between capacity and range for 5G.

Luebchow expects 2% to 3% annual sales growth from Verizon, and for potential additional growth to come from new 5G-related business lines that further off, such as mobile-edge computing. He initiated Verizon stock at the equivalent of Hold, with a $60 price target—about where the stock recently traded. It sports a 4.1% annual dividend yield.

AT&T faces the greatest challenges, Luebchow argues. Between a generous dividend, debt-repayment obligations, and the need to invest in areas like 5G infrastructure and new content for HBO Max, there are a lot of demands on the company’s cash flows.

“In our view, T is in a difficult position as it struggles to balance investing in its core business segments (wireless, fiber-to-the-home) while deleveraging and paying a sizable dividend,” Luebchow writes. “This balancing act is made more difficult by continued declines in legacy business segments (linear TV, enterprise wireline) and the Covid-19 impact on its WarnerMedia business, which will continue to be a headwind into 2021.”

He calls the dividend—currently yielding 7.2% annually—safe for the present, but expects the conversation on Wall Street to continue to circle around a potential cut. Luebchow rates AT&T stock at the equivalent of Sell, with a $25 price target. That is 14% below the shares’ recent $29.

Luebchow also initiated coverage of United States Cellular (USM). He sees the company’s smaller and more regional presence as a competitive disadvantage versus the big three carriers, keeping a lid on growth. But the stock is unfairly discounted, he writes, especially when considering the potential value of U.S. Cellular’s tower portfolio. That alone could net $2.3 billion to $3 billion to shareholders in a potential sale—versus the company’s current market capitalization of about $2.7 billion.

Finally, Luebchow expects cable companies including Comcast (CMCSA), Charter Communications (CHTR), and Altice USA (ATUS) to continue gaining subscribers. Each has a wholesale agreement with one or more of the big three carriers for most of its customers’ network traffic, meaning they share in that growth. But the cable companies have been exploring ways to move traffic onto their own networks where they have a wired footprint, and have been in recent wireless spectrum auctions.

T-Mobile stock has soared 64% since the start of 2020, versus a 3.5% return including dividends for Verizon, and a 21% loss after dividends for AT&T. U.S. Cellular stock has declined about 12% this year. The S&P 500 and the Dow Jones Industrial Average have returned 14% and 5%, respectively, year to date.

Write to Nicholas Jasinski at [email protected]