Oppenheimer Upgrades Verizon, Downgrades T-Mobile

The wireless industry is set for growth with the coming of 5G, and that's good news for Verizon Communications Inc. VZ. But T-Mobile US Inc. TMUS shareholders may not be as likely to benefit because of drag from the company's pending merger with Sprint Corp S.

The Analyst

Oppenheimer’s Timothy Horan upgraded Verizon from Perform to Outperform with a $70 price target.

Horan downgraded T-Mobile from Outperform to Perform and removed its $90 target price.

The Thesis

The move comes in front of what Horan said will be a difficult integration in the T-Mobile-Sprint merger, and what Oppenheimer sees as "weak Sprint trends."

Overall, the industry is set to see strong growth with the arrival of 5G technology and a host of new Internet of Things applications coming online. Average revenue per user should go up across the board, Horan said. And for Verizon, the coming change looks really good.

"The company should be early and successful in its 5G network, and we expect it to pick up a lot of mid-band spectrum inexpensively next year," Horan wrote in a note. "Its (average revenue per users) should continue growing, and strong cable wholesale growth is accretive."

But uncertainty prevails around the merger for T-Mobile.

Horan noted final approval could be on hold because of a lawsuit by state attorneys general, and Verizon is likely to target Sprint subscribers during the transition.

'Dead Money'

T-Mobile's stock “could pop after the deal closes but will likely be dead money for two years afterward as the combined company works through integration,” Horan wrote.

Oppenheimer lowered its estimates for Sprint because of assumptions about increased churn, and also is bearish on free cash flow generation because of integration expenses.

Price Action

Verizon shares were up 1.4% to $57.42 on Tuesday, while T-Mobile was down 0.74% at $77.48.

Related Links:

Mixed Signals: How Will A T-Mobile-Sprint Merger Play Out For Investors?

Sprint, T-Mobile Fall Amid Report DoJ May Not Approve Merger

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