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T-Mobile Approaching Cash-Flow 'Hockey Stick,' Wells Fargo Upgrades To Outperform

Jayson Derrick

Jennifer Fritzche, Wells Fargo's telecommunications analyst, upgraded T-Mobile US Inc (NASDAQ: TMUS) on Monday to Outperform from Market Perform with a valuation range boosted to $52-$54 from a previous $48-$50.

According to Fritzche, T-Mobile is approaching a "hockey stick" ramp to its free cash flow generation and this metric, more so than any other, will "likely become a key focus" for investors moving forward.

Fritzche said T-Mobile's free cash flow growth will extend into 2017 and won't be affected by spectrum costs from ongoing auctions. Specifically, the analyst is expecting the company to generate $1 billion in free cash flow in fiscal 2016, $2.6 billion in fiscal 2017 and $3.7 billion in fiscal 2018 under a "base case" assumption that the company spends $7 billion in spectrum auctions.

Related Link: T-Mobile: From Turnaround Story To Industry Powerhouse

However, even under an extreme scenario in which the company spends $8.3 billion in auctions, it will still generate almost $3 per share in free cash flow in 2017.

The analyst also stated that adjusting T-Mobile's valuation for non-cash items such as lease depreciation,the stock is trading at "only" 6.0 times 2017E EBITDA which is at a discount to Sprint's 8.0 multiple and AT&T's 6.7 multiple.

Bottom line, T-Mobile will see more free cash flow growth in 2017 than its peers and this should be the "primary focus" among investors.

Latest Ratings for TMUS

Date Firm Action From To
Aug 2016 Wells Fargo Upgrades Market Perform Outperform
Aug 2016 Buckingham Research Maintains Buy
Aug 2016 BTIG Research Maintains Buy

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