UBS upgrades Deutsche Telekom to 'buy' on US exposure, growth outlook

Investing.com -- UBS Global Research has upgraded Deutsche Telekom (OTC:DTEGY ) to a "buy" rating, citing the recent pullback in the company’s stock price as an attractive entry point. 

Shares of German telecom company were up 1.5% 06:02 ET (11:02 GMT). 

This follows a decline of about 6% in the share price, which UBS attributes to cautious commentary on the company’s Q4 performance, as well as a 14% pullback in the stock of T-Mobile US (NASDAQ:TMUS ). 

According to UBS, the decline is largely driven by the trimming of 2025 Free Cash Flow estimates and profit-taking after a strong stock performance in the past. 

However, UBS sees the pullback as a chance to capitalize on Deutsche Telekom’s US exposure, noting that more than two-thirds of its EBITDA is derived from the US.

The research team believes that Deutsche Telekom is well-positioned for growth, with expected annual earnings per share growth of 11%, which is relatively insulated from the price competition currently impacting some European markets. 

UBS has raised its price target for Deutsche Telekom to €33, up from €31, largely driven by favorable exchange rate movements. The analysts also highlight multiple potential upside catalysts for the stock. 

These include further strength in the US dollar, positive developments regarding T-Mobile US’s outlook for 2025, potential US tax changes, possible mergers and acquisitions in the US, and the likelihood of continued share buybacks at Deutsche Telekom.

The upgrade comes after UBS had downgraded Deutsche Telekom to "neutral" in September 2024, driven by concerns over high expectations for the company’s Capital Markets Day in October and growing competition in the German mobile market. 

At that time, there were also uncertainties surrounding SoftBank’s 4.5% stake in Deutsche Telekom, which is set to be unlocked in December 2024. 

Since then, the key positive takeaways from the CMD have included the company’s commitment to maintaining leverage at 2.75x, which provides it with €15 billion in headroom for further options, such as increasing its stake in T-Mobile US or repurchasing Deutsche Telekom shares. 

Additionally, Deutsche Telekom’s CEO Tim Hoettges has extended his contract beyond 2026, which UBS considers a positive sign for the company’s long-term leadership.

Despite increasing competition in the German mobile sector, UBS argues that Deutsche Telekom’s business remains strong, largely due to its dominance in the German broadband market. 

Fixed-line services account for 70% of Deutsche Telekom’s revenue in Germany, and rising wholesale and retail pricing in this area continues to benefit the company. 

As a result, UBS forecasts modest growth in Deutsche Telekom’s German operations, with service revenues growing by 1.7% per year and EBITDA expanding by 2.9% annually from 2024 to 2027.

In the US, the outlook for T-Mobile US remains favorable, according to UBS, despite recent guidance suggesting a moderation in growth for 2025. 

T-Mobile US has been affected by the expiration of public subsidies for its low-income ACP program and the loss of wholesale revenue from customers like DISH and Tracfone. 

However, UBS points to the overall health of the US telecom market, with benign competition, low cable churn, and the potential for price increases. 

Furthermore, the company’s US business stands to benefit from any mergers and acquisitions in the US fiber market and the potential for fiscal tailwinds from the new US administration, such as lower corporate taxes and extended tax breaks.

Deutsche Telekom is also expected to continue delivering strong shareholder returns. UBS forecasts annual EPS growth of 11%, which should lead to a similar increase in its dividend per share, with an expected hike to €0.90 in 2024, representing a 17% increase. 

The company’s dividend policy, along with its strong free cash flow and commitment to reducing leverage, positions it well for further shareholder returns. Deutsche Telekom is also expected to repurchase €2 billion in shares over the next two years.

The analysts flag the defensive nature of the business, which offers solid double-digit EPS growth at an attractive valuation. 

UBS also points to several upside factors, including further shareholder returns, favorable foreign exchange movements, potential changes in US tax policy, and consolidation within the German mobile market. 

However, risks remain, particularly related to the potential placement of SoftBank’s stake in Deutsche Telekom, which could create some volatility.

Source: Investing.com