While the S&P 500 (^GSPC +0.29%) fell 18.1% and the Nasdaq Composite (^IXIC +0.89%) fell a brutal 32.5% in 2022, telecom winner T-Mobile (TMUS +0.29%) managed to defy gravity and log a 20.7% return last year.
The company released its fourth-quarter 2022 earnings report on Wednesday, Feb. 1. While there were some mixed numbers within the report, the overall guidance pointed to a potential repeat performance in the coming year, mainly due to management's forecast for a massive 75% acceleration in free cash flow.
You read that right. A "boring" telecom stock could show 75% free-cash-flow growth this year. Here's how.
NASDAQ: TMUS
Key Data Points
Q4 results largely met high expectations
In terms of headline numbers, T-Mobile beat consensus expectations for earnings per share, while slightly missing on revenues. However, the headline revenue figure isn't as relevant for telecom companies, which often sell or lease devices at a discount to drive services growth.
Meanwhile, T-Mobile's "core" operating metrics of services revenue, net additions, and core adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) were stronger, meeting expectations, while free cash flow of $2.2 billion exceeded expectations.
On the subject of free cash flow, T-Mobile's stock reacted favorably, likely because its forward guidance implied a massive 75% acceleration in free cash flow this year. Here's how all the pieces are coming together for "The Un-Carrier," fueling that 2023 profit trajectory.
Continued net adds, with a wireless broadband kicker
In the year ahead, T-Mobile forecasts another 5 million-5.5 million postpaid net customer additions, which it believes will fuel core adjusted EBITDA growth of 10% at the midpoint. That would be pretty solid growth for a telecom company, especially as T-Mobile usually guides pretty conservatively at the beginning of the year.
For instance, last February, T-Mobile guided for the exact same 5 million-5.5 million postpaid net additions but delivered over 6.4 million. Core adjusted EBITDA and free cash flow came in above the high end of the initial 2022 guidance range.
It's more of the same for T-Mobile, which has reclaimed the network lead in 5G from Verizon and AT&T after it merged with Sprint in early 2020. With a superior mid-band 5G network and equal-or-better prices, it's no wonder T-Mobile continues to steadily take share.
T-Mobile also has a rising growth driver in its new 5G wireless broadband offering, which accelerated in 2022 in its first full year of availability. Last year, T-Mobile brought in an incremental 2 million wireless broadband customers, bringing its total to 2.65 million.
The company had laid out a goal of 7 million-8 million wireless broadband customers by 2025, and it looks as if those plans are on track. While 5G wireless broadband will likely never match the speeds of fiber or coaxial cable, it's a low-cost offering that likely appeals to a lot of consumers, especially in rural areas. Even better for T-Mobile, wireless broadband doesn't require the incremental construction expense of digging trenches and routing cables into homes and apartment complexes.
T-Mobile was a rare 2022 winner and should repeat in 2023. Image source: Getty Images.
Speaking of capital expenditures...
A main driver of T-Mobile's free-cash-flow surge from $7.65 billion in 2022 to a projected $13.1 billion-$13.6 billion in 2023 is this-year's massive reduction in both capital expenditures and merger expenses. The combination of integrating Sprint's assets, while also rolling out nationwide ultra-capacity 5G, entailed huge upfront costs for T-Mobile over the past two years.
For instance, in 2022, T-Mobile spent $5 billion on merger-related costs, of which about $3.4 billion were cash outlays. Meanwhile, capital expenditures surged higher than the 2022 forecast to almost $14 billion.
However, the Sprint merger will conclude in the first half of this year, and those costs will drastically come down. In 2023, T-Mobile only plans to spend a final $1 billion of merger-related integration costs, of which cash outlays will be somewhat higher, and capital expenditures will plummet to between $9.4 billion and $9.7 billion.
That's a massive reduction in costs, and lives up to T-Mobile's projections of between $13 billion and $14 billion in 2023 free cash flow laid out at its 2021 Investor Day. Given that T-Mobile usually guides conservatively, it wouldn't be a stretch to think 2023 free cash flow could meet or exceed $14 billion.
Also encouraging, at that same 2021 analyst day, T-Mobile forecast over $18 billion in free cash flow by 2026. That compares to just a $187 billion market cap today.
Buybacks are here early and are growing
Speaking of market cap, 2023 will also be T-Mobile's first full year of share repurchases. T-Mobile was able to start its buyback program in September, about three months ahead of its initial 2021 plans to begin in 2023.
In the last few months of the year, management repurchased $3 billion in stock, with another $11 billion remaining on the current buyback program ending this September. However, it's highly likely T-Mobile will launch a new program when this one ends, as management had initially projected $60 billion in repurchases between 2023 and 2025 during its 2021 analyst day.
Two things to keep in mind here: That $60 billion program would retire nearly one-third of T-Mobile's shares at today's prices. However, Europe's Deutsche Telekom owned about 48.4% of T-Mobile as of last August. Therefore, the $60 billion program could retire roughly 60% of T-Mobile's publicly traded free float.
With accelerating free cash flow and management scooping up shares at these quite reasonable valuations, especially when considering the 2026 outlook, T-Mobile's stock will likely continue its strong performance in 2023.
