T-Mobile Deal Sends MetroPCS to New Highs

Shares of MetroPCS (NYSE: PCS  ) hit a 52-week high on Tuesday. Let's look at how it got here and whether more gains are ahead.

How it got here
The big news of the day was that T-Mobile and MetroPCS are merging, which will bolster T-Mobile's position in the prepaid market. MetroPCS initially confirmed yesterday that talks were under way but made it clear that there could be "no assurances" that anything would materialize since no finalized agreement has been reached. Both boards a deal approved this morning.

AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) continue to dominate the wireless market, but some consolidation among the smaller players would give them a leg up in terms of scale and efficiencies. Of course, Ma Bell spectacularly failed to acquire T-Mobile late last year. Much like that proposed deal, this one will also center on crucial spectrum. 

T-Mobile and MetroPCS will join spectrum forces, but the two use different cellular technologies that would require adjustment time before they can operate on a single standard. MetroPCS uses CDMA (like Verizon), while T-Mobile uses GSM and HSPA+ (like AT&T). MetroPCS has already begun its 4G LTE rollout, but T-Mobile hasn't quite yet.

The transaction is being structured as a reverse merger where MetroPCS effectively buys the larger T-Mobile, making T-Mobile domestically traded and giving Deutsche Telekom a future exit strategy.

How it stacks up
Let's see how MetroPCS' performance over the past few years compares to its peers:

PCS Chart

PCS data by YCharts.

We'll also include some fundamental metrics for more insight.

Company

P/E (TTM)

EPS Growth (TTM)

Net Margin (TTM)

ROE (TTM)

MetroPCS

12.8

41.6%

6.6%

11.2%

Leap Wireless (Nasdaq: LEAP  )

NM

69.4%

(10%)

(47.4%)

AT&T

50.2

(77.3%)

3.7%

4.1%

Verizon

45.7

(55.2%)

10.2%

7.5%

Sprint Nextel (NYSE: S  )

NM

(22.6%)

(11.1%)

(34.1%)

Source: Reuters. TTM = trailing 12 months. NM = not meaningful due to negative earnings.

As a fellow prepaid specialist, Leap Wireless got a big boost, too, as investors pondered who might be next should industry consolidation continue. The company wasn't directly involved in any talks, but that's never stopped speculation before. Sprint shares fell on the news as CEO Dan Hesse had recently predicted consolidation as well, and this deal increases competitive pressures on it.

What's next?
For an industry destined to forever be an oligopoly, continued consolidation seems inevitable as companies look to reap efficiencies in terms of capital investment as well as in tapping limited spectrum. T-Mobile just got a bit stronger.

Wireless carriers play a critical role in the next trillion-dollar revolution, but so do critical component players. This special free report outlines one company scoring plenty of design wins powering the next generation of mobile devices, many of which rely on cellular data connections. Click here to claim a free copy.

 

Evan Niu, CFA, owns shares of AT&T and Verizon Communications. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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