Fiber Expansion And ESG Initiatives Will Improve Future Prospects

Key Takeaways

• Strategic investments in fiber and strong service revenue growth enhance Deutsche Telekom's competitive edge and market share in U.S. and Europe.
  
• ESG initiatives and joint ventures in U.S. aim to improve margins and create favorable conditions for future financial growth.
  
• Increased competition, political instability, and macroeconomic risks could pressure Deutsche Telekom’s growth, while financial and strategic complexities pose additional challenges.

Catalysts

Provides integrated telecommunication services.

• Deutsche Telekom has shown strong recent performance and is on track to meet its upgraded full-year guidance due to significant service revenue growth and EBITDA growth both in the U.S. and the European markets, which should positively impact future revenue and earnings.
  
• The company is making strategic investments in expanding fiber to the home (FTTH), having passed 3.5 million European homes in the last 12 months. This initiative is expected to bolster future broadband revenues and maintain competitive edge in the telecommunications market.
  
• Deutsche Telekom has seen robust growth in customer numbers both in mobile and broadband services, notably with postpaid growth in the U.S. and growth in TV and OTT services. This is likely to further drive enhancements in revenue and market share going forward.
  
• ESG commitments are expected to yield operational efficiencies with a reduction in both CO2 emissions and energy consumption which may help sustain or enhance future net margins despite rising data consumption.
  
• The strategic benefits from recent joint ventures in the U.S., supported by DOJ approval, and potential regulatory tailwinds from the U.S. election election insights provide a potentially more favorable climate for Deutsche Telekom's growth ambitions in terms of EBITDA and free cash flow outlooks.

Deutsche Telekom Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Deutsche Telekom's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 8.5% in 3 years time.
• Analysts expect earnings to reach €10.7 billion (and earnings per share of €2.39) by about December 2027, up from €6.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2027 earnings, down from 24.4x today. This future PE is lower than the current PE for the GB Telecom industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 3.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.26%, as per the Simply Wall St company report.

Deutsche Telekom Future Earnings Per Share Growth

Risks

• Rising competition in the German market, particularly from companies like Vodafone and others, may put pressure on Deutsche Telekom’s revenue growth and profit margins in their home market.
  
• Concerns about political instability in Germany and potential regulatory changes could impact the company's operations or growth strategy, thereby affecting earnings.
  
• The macroeconomic environment in Germany, although currently not impacting Deutsche Telekom directly, poses a risk to consumer spending and business investment, which could lead to slower revenue growth.
  
• The repayment schedules with partners like 1&1 for fiber investments may lead to fluctuations in cash flow, affecting financial stability and reducing free cash flow in the near term.
  
• The rising share price of T-Mobile US creates complexities in executing strategic buybacks or capex plans which could lead to changes in expected return on investment and impact Deutsche Telekom’s earnings and shareholder value.
  

Valuation

• The analysts have a consensus price target of €33.31 for Deutsche Telekom based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €43.0, and the most bearish reporting a price target of just €20.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €125.7 billion, earnings will come to €10.7 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 4.3%.
• Given the current share price of €29.79, the analyst's price target of €33.31 is 10.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.