So far, T-Mobile (TMUS) stock has risen more than 22% this year. Recent developments related to the company’s merger with Sprint (S) continued to drive the stocks. Sprint stock has only gained 5% this year—a significant underperformance.
After waiting for more than 18 months, the merger between T-Mobile and Sprint seems to be in the final stages. The Department of Justice approved the merger in July. The merger also received majority support from the FCC (Federal Communications Commission) this week. However, more than a dozen states have filed a lawsuit to block the merger on antitrust grounds. On Wednesday, Mississippi backed out of the lawsuit and supported the merger.
How are T-Mobile and Sprint stocks placed?
Let’s see where T-Mobile stock could go amid its pending merger with Sprint. The stock closed at $77.9 on Wednesday—close to its 50-day moving average and 5% above its 200-day moving average, respectively. The stock has largely taken the support of its 50-day levels. The current level at $78.2 might support T-Mobile stock in the short term. T-Mobile stock has fallen approximately 10% from its 52-week high of $85.2 in July.
In comparison, Sprint stock continues to look weak given its moving average levels. Currently, the stock is trading at $6.1—almost 8% and 5% below its 50-day and 200-day levels. The fair discount to both of Sprint’s key levels indicates weakness in the stock. The levels close to $6.5 could act as a resistance for the stock in the short term.
Sprint stock was weak particularly after the FCC accused it of wrongfully claiming subsidies. To learn more, read T-Mobile–Sprint Merger Is Now More Uncertain.
T-Mobile stock is trading at a PE ratio of 16x based on its projected earnings for the next 12 months, which is much lower than its historical average. However, the stock appears to be trading at a premium. The industry’s average valuation is around 13x.
Interestingly, analysts expect T-Mobile’s EPS to grow 20% year-over-year in 2019 and 2020. The stock has an attractive valuation considering the potential earnings growth.
Sprint is trading at a forward EV-to-EBITDA multiple of 5x, while T-Mobile is trading at 7x. We considered Sprint’s EV-to-EBITDA valuation since it didn’t report profits in the last few quarters.
T-Mobile will likely report its third-quarter earnings on October 31. According to analysts’ estimates, T-Mobile will report earnings of $838.0 million on revenues of $11.3 billion for the quarter ended September 30. Sprint will likely report revenues of $8.2 billion in the same quarter. Sprint will be the biggest beneficiary if the merger with T-Mobile goes through. To learn more, read Sprint’s Woes Look Bigger amid Pending T-Mobile Merger.
The short interest in T-Mobile stock has increased 26% as of September 30. The total number of shorted shares in T-Mobile was 11.1 million on September 13. Meanwhile, the total number of shorted shares increased to almost 14.0 million on September 30. The short interest indicates investors’ anxiety. A rise in the short interest might suggest that more investors expect the stock to fall from its current levels. Recently, the short interest in Sprint increased 2%.
Sprint is one of the most volatile stocks in the industry. The company’s implied volatility increased above 50% today—higher than its 15-day average. T-Mobile’s implied volatility was around 20%.
Analysts’ target prices
Wall Street analysts seem positive about T-Mobile stock. They have given the stock a mean target price of $88.4, which suggests an estimated upside of 13.7% for the next 12 months. Sprint stock offers a potential upside of 11% based on its mean target price of $6.81.