Wireless Telecommunications: Buy T-Mobile (TMUS); Verizon (VZ) Estimates Cut On Strike - UBS

UBS analyst, John C. Hodulik, noted that 1Q provided more evidence of low volumes, low churn and record profits. As expected, upgrade rates reached an all-time low, postpaid churn and gross adds continued to fall, and despite sluggish top line performance (total wireless revenues +0.3%; service revenues -1.9%), profitability and margins reached a record high, topping the prior record set just two quarters ago. Postpaid handset trends have been fairly consistent with sustained losses at AT&T (NYSE: T) (-363K), resilient trends at Verizon (NYSE: VZ) (-8K), continued momentum at T-Mobile (NASDAQ: TMUS) (+877K), and positive adds at Sprint (NYSE: S) (+22K).

The outlook is improving outlook for TMUS while the strike is impacting results at VZ TMUS 2Q EBITDA increases by 2.4% to $2.3B given better revenues and continued cost control. The company is expcted to generate $2B in FCF (including ~$0.8B in factoring), suggesting $2.3B over the next 3 quarters.

Verizon EPS drops to $3.87 from $3.90 given expenses related to the ongoing strike. They now expect FiOS video and data sub losses for the quarter. While they view implications from the strike to be temporary speed bumps for the company as it seeks to right size its wireline cost structure (the newly constituted segment is borderline profitable), continuation of the strike into the summer could require additional changes.

T-Mobile is the analyst's top wireless pick given its strategic value, growth trajectory and attractive valuation. They also maintain our Buy rating on AT&T given additional cost cutting opportunities associated with the DTV acquisition and potential upside from the bundling strategy. Verizon and Sprint remain Neutral rated stocks.

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