LightShed examines bear case valuations in wireless carriers
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Analysts at LightShed Partners have lately highlighted the "growth problem" for the 5G wireless space, but a fresh look examines more of a bear-case situation, where valuations could decline even further.
That comes with the assumption that wireless carriers have little to no pricing power, analyst Walt Piecyk said.
LightShed typically uses free cash flow as the main driver of valuations, though some have noted the firm's fair market or target EBITDA multiples could be lower.
The firm's total enterprise value to EBITDA multiples include obligations for pension and tax liabilities, an approach not taken by peer firms.
"But why? From time to time, billions drop out of cash from these companies to reduce these obligations. These additional obligations are not small," Piecyk wrote.
That tends to add one turn to the firm's multiples, and examining a scenario where they reduced multiples per company by one turn yields somewhat lower valuations.
Verizon (NYSE:VZ), for example, is the group's slowest grower, and LightShed has the company at enterprise value-to-EBITDA of 8.3x. Reducing that by a turn to 7.3x cuts fair value from $53 to $41 (vs. a current $50.82).
But Charter (NASDAQ:CHTR) would see the most impact from multiple compression due to high debt leverage, Piecyk noted. Cutting its multiple to 8.0x from 9.0x brings a fair value at $375 (vs. the current $474.19): "Yikes."
But given the share repurchase activity of the company, that valuation would mean a 12.5% free cash flow yield on 2023. (The Verizon example would mean a 13.5% free cash flow yield on 2023 estimates.)
Running the lower-turn scenario on T-Mobile (NASDAQ:TMUS) reduces fair value from $140-$150 closer to $120-$125 (vs. a current $130.51). And cutting AT&T's (NYSE:T) TEV/EBITDA to 7.6x from 8.6x would reduce its fair valuation to $21 from $27 (vs. the current $20.69).