How Can We Analyze T-Mobile US (TMUS) Like Ben Graham?

Based on the factors that Benjamin Graham considered in analyzing potential stock picks, T-Mobile US is not a quality investment. Only investors with a high risk tolerance and a solid investment thesis on the stock will be interested in this large-cap Communication Equipment company.

T-Mobile US Is Probably Overvalued

Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:

√(22.5 * 6 year average earnings per share (3.27) * 6 year average book value per share (55.702) = $50.71

At today's price of $140.3 per share, T-Mobile US is now trading 176.7% above the maximum price that Graham would have wanted to pay for the stock.

Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.

Impressive Growth, but Inconsistent Profitability and no Dividend

T-Mobile US’s average sales revenue over the last 6 years has been $80.16 Billion, so by Graham’s standards the company is large enough to warrant an investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today. Needless to say, this is the least important of Graham's requirements, and may be overlooked by all but the most conservative investors.

More importantly, Ben Graham believed that a margin of safety could be obtained by investing in companies with consistently positive retained earnings. T-Mobile US had negative retained earnings in 2019, 2020, and 2021 with an average of $-11129984357.142857 over this period. So the company is not accumulating enough cash over time by Graham's standards.

Graham also required a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.To determine T-Mobile US's EPS growth over time, we will average out its EPS for 2008, 2009, and 2010, which were $0.42, $0.49, and $0.04 respectively. This gives us an average of $0.32 for the period of 2008 to 2010. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $2.65, $2.41, and $2.06, for an average of $2.37. Now we see that T-Mobile US's EPS growth was 640.62% during this period, which satisfies Ben Graham's requirement.

We have no record of T-Mobile US offering a regular dividend.

Negative Current Asset to Liabilities Balance and Not Enough Current Assets to Cover Current Liabilities

Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. T-Mobile US fails on both counts with a current ratio of 0.8 and a debt to net current asset ratio of -0.5.

According to Graham's analysis, T-Mobile US is likely a company of low quality, which is trading far above its fair price.

2018-02-08 2019-02-07 2020-02-06 2021-02-23 2022-02-11 2023-02-14
Revenue (MM) $40,604 $43,310 $44,998 $68,397 $80,118 $79,571
Gross Margins 56.0% 57.0% 59.0% 59.0% 54.0% 54.0%
Operating Margins 11% 12% 13% 10% 9% 10%
Net Margins 11.0% 7.0% 8.0% 4.0% 4.0% 3.0%
Net Income (MM) $4,536 $2,888 $3,468 $3,064 $3,024 $2,590
Net Interest Expense (MM) -$1,654 -$1,338 -$1,111 -$2,701 -$3,342 -$3,364
Depreciation & Amort. (MM) -$5,984 -$6,486 -$6,616 -$14,151 -$16,383 -$13,651
Earnings Per Share $5.14 $3.36 $4.02 $2.65 $2.41 $2.06
EPS Growth n/a -34.63% 19.64% -34.08% -9.06% -14.52%
Diluted Shares (MM) 872 858 863 1,155 1,254 1,255
Free Cash Flow (MM) $14,896 $9,567 $14,182 $21,007 $35,609 $34,082
Capital Expenditures (MM) -$11,065 -$5,668 -$7,358 -$12,367 -$21,692 -$17,301
Net Current Assets (MM) -$39,089 -$39,469 -$48,827 -$110,933 -$116,570 -$122,615
Long Term Debt (MM) $26,707 $26,706 $24,944 $66,546 $68,570 $66,796
Net Debt / EBITDA 2.55 2.23 1.98 3.1 3.1 3.31
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.