Berkshire Hathaway (BRK-B) has an equity investment portfolio worth over $360 billion, as of the end of the 2022 first quarter.

Berkshire Hathaway’s portfolio is filled with quality stocks. You can follow Warren Buffett stocks to find picks for your portfolio. That’s because Buffett (and other institutional investors) are required to periodically show their holdings in a 13F Filing.

As of March 31st, 2022, Buffett’s Berkshire Hathaway owned just over five million shares of T-Mobile US Inc. (TMUS) for a market value of $673 million. T-Mobile represents about 0.2% of Berkshire Hathaway’s investment portfolio.

This article will analyze the telecom services company in greater detail.

Business Overview

T-Mobile, through its subsidiaries, provides wireless services for branded postpaid and prepaid, and wholesale customers. The company has operations in the U.S., Puerto Rico, and the U.S. Virgin Islands. T-Mobile offers voice, messaging, and data services.

The company’s product offerings include wireless devices, such as smartphones, tablets, and wearables, as well as accessories and wireline services.

T-Mobile was founded in 1994 and has a market capitalization of more than $181 billion today. The company produced revenue of $79 billion last year.

However, T-Mobile is on pace to generate more than $80 billion of revenue this year on account of its completed merger with Sprint in April of 2020.

On July 7^th, 2022, T-Mobile released Q2 2022 results for the period ending June 30th, 2022. For the quarter, total revenues came in at $19.7 billion, a small decrease compared to Q2 2021. Service revenue, however, grew 6% year-over-year to $15.3 billion.

Net Income totaled ($108) million or ($0.09) per share, compared to $978 million or $0.78 per share in the year-ago period. The company had $1.3 billion of merger-related costs which accounted for $1.00 per share in the quarter.

T-Mobile had total net customer additions of 1.8 million in the quarter. And at the end of the quarter, T-Mobile had 110 million total customers.

T-Mobile also provided an updated outlook for 2022. The company now expects net customer additions to be between 6.0 million and 6.3 million, up from prior guidance of 5.3 – 5.8 million.

Growth Prospects

T-Mobile’s best prospect for future growth are the results of its merger with Sprint. The company has begun its Sprint network shutdown and expects to substantially complete decommissioning by end of the third quarter 2022.

In fact, T-Mobile just raised merger synergies guidance to a range of $5.4 to $5.6 billion for 2022, from prior guidance of $5.2 to $5.4 billion.

The company should continue to make large investments in its network, which may result in increased market share as it takes customers away from other established wireless giants such as AT&T and Verizon.

5G should also be a boost to T-Mobile’s business. The company’s 5G network is incredibly large, covering more than 300 million people. T-Mobile’s 5G network is available in all 50 states and Puerto Rico.

From 2016 to 2021, T-Mobile’s earnings-per-share have compounded at an annual rate of 24%, which helps explain the doubling of the share price over this period of time.

Given the very low earnings estimate for this year after a depressed Q2 due to one-time costs, we estimate that T-Mobile can continue growing earnings per share by 20% off this point.

Competitive Advantages & Recession Performance

One of the primary advantages that T-Mobile has is that is been adding new customers at a very high rate.

Source: Investor Presentation

In the second quarter, T-Mobile had more than 380 thousand net additions, which were the highest in company history.

The increase in revenue per account is due to higher revenues from each individual user. The average revenue per user has climbed in almost every quarter in 2021 and so far in 2022. T-Mobile generated $48.96 of revenue per user in the second quarter, a 2.8% increase from the same quarter a year ago.

T-Mobile’s churn ratio decreased 7 basis point year-over-year and 13 basis points sequentially and remains very low at 0.80%. The decrease increase in churn rate was attributed to integration updates and seasonal trends.

The company’s most recent earnings results showed that it is leveraging its competitive advantages to its benefit. The company’s service revenues increased 6% to $15.3 billion, and core adjusted EBITDA grew 10% to $6.6 billion for the quarter.

Valuation & Expected Returns

Since 2015, shares of TMUS have traded with an average valuation of around 31.7 times earnings. The average valuation is trending downward, with the 5-year average PE amounting to 27.1. Based on expected earnings-per-share of $2.30 for fiscal 2022, along with a current stock price of ~$144, T-Mobile is presently trading at a highly elevated price-to-earnings ratio of 62.6. This could indicate that shares are currently overvalued.

Our fair value estimate for T-Mobile stock is 22.0 times earnings. If this proves correct, the stock will incur losses of -18.9% annually in its returns through 2027.

T-Mobile currently pays no dividend, thus there is no dividend yield to add to total returns.

Putting it all together, the combination of valuation changes and EPS growth produces total expected returns of -2.7% per year over the next five years. This makes T-Mobile US a sell.

Final Thoughts

T-Mobile has grown earnings impressively over the last five years. Following its merger with Sprint, the company anticipates continued strong growth. However, shares appear to be trading at a very high valuation today. And the company does not pay a dividend.

As a result of estimated negative total returns, T-Mobile US, Inc. earns a sell rating.

More By This Author:

Blue Chip Stocks In Focus: MDU Resources Group
Blue Chip Stocks In Focus: Matthews International Corp.
Blue Chip Stocks In Focus: Northeast Indiana Bancorp, Inc.