Did This CEO Accidentally Signal A Blowout Quarter?

I’ve heard you need to be something of an egomaniac to be the CEO of a Fortune 500 company. 

Sure, the pay is great, but to compensate for the grueling hours and the ultimate stress of being the scapegoat for any corporate failure, you have to take no small amount of joy in being No. 1.#-ad_banner-#

That is why I make sure I pay attention whenever a CEO gives an interview just before earnings are released.

Chief executives are supposed to be reserved and stick to objective facts. Just a few misplaced words can front-run their earnings report and incur the wrath of an angry board — and possibly the Securities and Exchange Commission. 

That is what they are supposed to do. You see, not only are CEOs the managerial leaders of their companies, but they are often tasked with being their companies’ biggest cheerleaders as well. Combine this role with the subconscious need to tout their success, and they often let clues slip.

Now, I’m not recommending you trade based only on reading between the lines of a CEO interview. That’s speculation and best left to those with too much money and too little sense. 

But combine a “CEO hint” with a company looking at earnings growth of 425% next year and a new program that is gaining more customers than its three largest rivals combined… well, that might be something you want to look at.

The Wireless Wars Have Begun
John Legere, CEO of T-Mobile USA (NYSE: TMUS), appeared on “Bloomberg West” on Oct. 10 after a media event the night before launching the carrier’s new Uncarrier 3.0 program. Uncarrier 3.0 requires no annual service contract, offers unlimited international data and text to more than 100 countries and subscribers can upgrade their phone twice a year on demand.


Flickr/Chris Potter  
  With 35 million subscribers, T-Mobile is already the fourth-largest company in the U.S. wireless market.


With 35 million subscribers, T-Mobile is already the fourth-largest company in the U.S. wireless market, and it made huge gains in market share on its previous Uncarrier program. Since the launch of Uncarrier in the second quarter of this year, the company has added 1.1 million phone customers in the United States, more than Verizon Communications (NYSE: VZ), AT&T (NYSE: T) and Sprint (NYSE: S) — combined.

Legere, who has been the CEO of the company for about a year, said T-Mobile is focusing on “customer pain points,” such as fears of overages and restrictions calling internationally. Imagine: A phone company is actually listening to what people want, and it’s scoring huge subscriber growth in return.

Rival carriers were slow to react against T-Mobile’s market share gains in the second quarter, and the third quarter will probably show more customer gains from AT&T and Sprint. You’d better believe that they are going to fight hard against Uncarrier 3.0 to keep T-Mobile from running away with a very lucrative market.

Sprint has tried to position itself as the low-cost provider with its new $80 unlimited offer, just under T-Mobile’s $90 plan (including service and equipment charge). Verizon and AT&T both charge $110 a month in service fees but may come to the market with more competitive pricing in the near future.

While expectations for T-Mobile’s earnings this year have suffered the same downward revisions seen across the market, expectations for next year have jumped 15% over the past three months, to $0.85 a share. This would be more than a fourfold increase over this year’s expected $0.20 a share.

Legere also cited a speed test that shows T-Mobile’s network is LTE nationwide and testing faster than Verizon and Sprint, and is testing faster than AT&T in half of the top 20 U.S. cities. He went on to say that he almost slipped by announcing that the company had the fastest 4G LTE, adding, “At some point, I’m going to announce that we are the fastest (4G LTE).” There is a chance that he may announce this at the earnings call but that’s not the only slip he made.

Say What?
When pressed on the idea that the company is moving into the lower price market, Legere said, “We are all going to announce earnings over the next three weeks, so stay tuned to see how this continues forward.” 

Legere is a straightforward and competitive CEO, perhaps even more so than other chiefs. It may be reading between the lines, but along with other comments in the interview, I think his comment is a case of his wanting to pre-announce some great results — but holding back with a “just you wait and see.”

While T-Mobile does not report until Nov. 5, Verizon will report first on Oct. 17, followed by the other two carriers. Investors may want to build a position in T-Mobile before Oct. 17 in case Verizon earnings show subscriber loss to another company. I would set a buy-under price of $30; anything above this before earnings may imply that an upside surprise has been baked into the shares.

Market share gains and CEO slip-up aside, the company may also be a strong takeover target. Dish Network (Nasdaq: DISH) has been aggressively trying to find a wireless partner to complement its satellite services, but it lost out in a fight with Softbank to acquire Sprint with a final bid of $25.5 billion. 

After adjusting for Sprint’s stake in Clearwire and net debt, the offer was for an enterprise multiple of 7.0 times earnings before interest, taxes, depreciation and amortization (EBITDA). T-Mobile currently trades for 6.4 times 2014 expected EBITDA, well under what Dish was offering and cheap compared with AT&T’s valuation at 7.4 times next year’s expected EBITDA.

A relatively cheap company that is changing the way wireless carriers compete and seeing triple-digit earnings increases: That is definitely something to brag about, and I think Legere just did — but no one was listening.

Risks to Consider: Expectations for the quarter are already high with revenue estimates more than 400% higher than the same quarter last year. The company has missed earnings estimates for the past three quarters, and the stock remains a high-risk, high-reward play.

Action to Take –> Beyond its Nov. 5 earnings report, T-Mobile may offer a long-term outperform against peers as its new program gives it a price advantage and wins market share.

P.S. T-Mobile may be set to seize command of the wireless industry, but my collegue Elliott Gue has just put together a list of 10 other companies that he thinks will be the best investments to own in 2014. For more info, check out his report, “The Top 10 Stocks Of 2014.”