Wells Fargo Securities analysts upgraded shares of T-Mobile, saying the carrier appears to be nearing a “hockey stick” increase in free cash flow generation. And unlike many other analyst firms, Wells Fargo maintained a positive outlook for Sprint.

Jennifer Fritzsche and her colleagues predicted the nation’s third-largest carrier will generate $1 billion this fiscal year, $2.6 billion the following fiscal year and $3.7 billion the year after, marking a compound annual growth rate of 92 percent assuming T-Mobile spends $7 billion during the ongoing incentive auction of 600 MHz spectrum. Even if the operator spends substantially more at auction, though, it will continue to ramp up free cash flow generation substantially, Wells Fargo said. And that will be a key metric for investors.

“In our view, we are getting closer to an important 'hockey stick' part of the free cash flow generation ramp,” the firm said in a research note. “This assumes that in what we define to be our ‘base case’ scenario T-Mobile spends $7 billion in the auction. This is clearly one of the wildcards headed into 2017 and we stress test three different auction spending scenarios in our analysis ($5 billion, $7 billion and $8.3 billion in spend). Even in our ‘high’ auction spend scenario ((8.3 billion), we estimate T-Mobile will generate almost $3 billion in free cash flow per share in 2017.”

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Wells Fargo said it expects T-Mobile to add 5.9 million total prepaid and postpaid customers next year, down from the 7.8 million it expects the carrier to add in 2016. But T-Mobile has been investing roughly $200 million a year to modernize its IT infrastructure including a migration to cloud-based apps, the firm said, which should enable the carrier to expand EBITDA margins “well beyond its current 36 percent.”

The firm also said it expects both T-Mobile and Sprint to leverage the release of a new iPhone due to their new unlimited-data plans. Neither of the nation’s two largest carriers – Verizon and AT&T, namely – offer unlimited plans to all their subscribers, Wells Fargo noted, and both are positioned to lose customers to their smaller counterparts.

“While we recognize August is a slow month, our checks would suggest that (T-Mobile) saw a step up in porting trends from the two largest carriers so far this month vs. July,” according to Wells Fargo. “We believe it is fair to assume this trend could continue to be the case, especially given that AT&T is not chasing growth and is very much toeing the line with pricing. Despite the recent rollout of new plans, AT&T’s unlimited monthly price point (for a single user is still $30 above T-Mobile’s plan and $40 above Sprint’s price plan…. We also note that the other large national player is not offering an unlimited plan.”

Wells Fargo upgraded shares of T-Mobile from “market perform” to “outperform.”

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