T-Mobile’s forward PE valuation
The two best valuation multiples used for valuing companies such as T-Mobile (TMUS) are the forward PE (price-to-earnings) and EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples, considering the relatively stable and visible natures of these companies’ earnings.
The PE multiple represents what one share can buy for an equity investor. On November 29, 2016, T-Mobile was trading at a forward PE multiple of ~29.71x, higher than Verizon’s (VZ) and AT&T’s (T) 12.72x and ~13.29x, respectively.
T-Mobile’s Forward EV-to-EBITDA valuation
The capital-intensive telecommunications (telecom) industry has high levels of depreciation and amortization and varying degrees of debt and operating leases. To neutralize these factors, we use the EV-to-EBITDA ratio to value telecom stocks. The forward EV-to-EBITDA ratio shows what investors are willing to pay for the next four quarters of a company’s estimated EBITDA.
T-Mobile’s forward EV-to-EBITDA metric was ~6.42x, larger than Sprint’s (S) ~5.87x. Meanwhile, integrated US telecom giants Verizon and AT&T had similar EV-to-EBITDA metrics of ~6.71x and ~6.60x, respectively.
Wall Street analysts’ recommendations for T-Mobile
As we can see in the chart above, on November 29, 2016, the majority of analysts recommended “buys” on T-Mobile’s stock. These recommendations represented ~77.8% of the 27 analysts covering the stock. Meanwhile, ~18.5% of analysts recommended “holds” on TMUS, and the remaining ~3.7% recommended “sells.”