Why You Should Be Shorting Sprint

Few economic vehicles are as brutally Darwinian as the stock market. The strong survive, the weak don't. And I can't think of a stock that deserves extinction more than Sprint Nextel (NYSE: S  ) .

Sound crazy? Maybe, but I'm backing my view with a short-side CAPS call. Here's why:

  • Failure to connect. According to reporting by Bloomberg, the board nixed a secret $8 billion bid for wireless carrier MetroPCS (NYSE: PCS  ) . There are two problems here. First, the board's rare action calls into question CEO Dan Hesse's ability to lead. Second, the state of MetroPCS' financials -- marred as they are by declining margins and evaporating free cash flow -- suggests that Hesse was acting out of desperation rather than strategic interest.

  • The iPhone. You heard me right! Sprint is paying such a massive premium to Apple (Nasdaq: AAPL  ) for the rights to distribute the iPhone that its margin on operating profits before depreciation and amortization fell from 16% in last year's fourth quarter to just 9.5% in the December period. And it's going to get worse before it gets better: Sprint is on the hook to purchase $15 billion worth of iPhones over a four-year period.

  • Awful financials. Of course, Sprint may well go bankrupt before the deal expires. Debt as a percentage of equity and capital has risen every year since 2006, the stock is trading near a 52-week low, and levered free cash flow fell nearly two-thirds last year, to a seven-year low. Sprint's best option for raising capital may be to take on more debt that it can't afford.

Shorting carries risks, to be sure. But the stock market consists of both buyers and sellers, and we need sellers -- including short-sellers -- to ensure that undeserving businesses aren't priced at wealth-destroying premiums.

Put differently: When it comes to the business of investing for market-beating returns ... THIS. IS. SPARTA! Weakling stocks such as Sprint need not apply. There are too many other great options for betting on the rise of mobile computing. The Motley Fool recently identified a hidden winner in a new report entitled "The Next Trillion-Dollar Revolution." The research is free, but only for a limited time. Click here to get your copy now.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple at the time of publication. Check out Tim's Web home, portfolio holdings, and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 02, 2012, at 11:27 PM, funspirit wrote:

    I hope sprint doesn't go bk, I have used them for 14 years !

  • Report this Comment On March 02, 2012, at 11:34 PM, Raymondpoppy wrote:

    According to the report “Corporate Taxpayers & Corporate Tax Dodgers 2008-10,” two of the 25 companies with the largest total tax subsidies were AT&T at #2 ($14.5 billion) and Verizon at #3 ($12.3 billion). Also, there were 30 corporations that paid less than nothing in aggregate federal income taxes over the same period. These 30 companies, whose pretax U.S. profits totaled $160 billion over the three years, included Verizon. The report states the laws that allow this were not enacted in a vacuum, but rather were adopted in response to relentless corporate lobbying, threats and campaign support.

    AT&T remains the worst carrier in the United States, according to an annual customer satisfaction survey compiled by Consumer Reports. The mobile provider ranked dead last for the third year in a row.

    In other news, in a poll that asked 4,040 smartphone users how many dropped calls they had experienced in a three-month period, AT&T — carrier of Apple's iPhone and iPad mobile devices — came in dead last among the country's four largest carriers.

  • Report this Comment On March 02, 2012, at 11:35 PM, Raymondpoppy wrote:

    Maybe consumers will begin to finally notice that AT&T and Verizon = The Most Expensive Wireless Plans in America. We know where Verizon and AT&T (both in the top 5 for corporate lobbying) get all that money to run commercials 24x7, pay out huge “fat cat” executive bonuses and hire armies of lawyers and lobbyists to try to push the U.S. market into a wireless industry duopoly -- the American consumer. This is how AT&T and Verizon fashion themselves as brilliant … with their political use of money.

  • Report this Comment On March 02, 2012, at 11:35 PM, Raymondpoppy wrote:

    The fact remains that Sprint is the only U.S. carrier to offer new and existing customers the iPhone experience with unlimited data plans starting at $79.99 per month. An investment writer recently summed it up best: “Sprint now offers the best value proposition for a new smartphone user. I got my first smartphone on Sprint this fall because a new AT&T or Verizon data plan, without being grandfathered in with an earlier, lower price, is outrageous. My plan includes 450 afternoon mobile-to-landline minutes, unlimited other minutes, and unlimited texting and data for $79.99. Unlimited AT&T or Verizon plans would have approached $150, and to get a comparably-priced package, I'd have to settle on limited data or texting plans, which I'd have to constantly try to not blow through. Why get a smartphone if you can't have fun using it?”

  • Report this Comment On March 03, 2012, at 12:52 AM, Acesnyper wrote:

    Wow, first post sure is out for blood.

    While sprint's woes are known, not everyone keeps up and well, this is another round of woes.

    As Raymondpoppy wrote even with how little the margin is on the iphone it's still the cheapest out there and that will get people on board.

    Sprints in a bad place and should be shorted as of now but folding, I am not sure you should just throw the name out.

  • Report this Comment On March 03, 2012, at 8:51 AM, aimcbt wrote:

    Tim, when you say things like, "And I can't think of a stock that deserves extinction more than Sprint Nextel" it smacks of insensitive, lazy journalism. To you it may be simply an underperforming stock but there are 40,000 families that depend on it not going extinct. It's easy to pile on isn't it? Why not instead offer ideas to help pull it out of the mud?

  • Report this Comment On March 03, 2012, at 9:26 AM, TMFMileHigh wrote:

    @aimcbt,

    >>To you it may be simply an underperforming stock but there are 40,000 families that depend on it not going extinct. It's easy to pile on isn't it? Why not instead offer ideas to help pull it out of the mud?

    Fair enough. My point wasn't to be insensitive but to remind that shorting is necessary and important for a functioning stock market, and to offer reasons why Sprint is an excellent short-side candidate.

    Now here are three ideas for what the co. might do in order to pull free from its death spiral:

    1. CONCENTRATE. Sprint is at a moment that requires difficult choices. Committed to the iPhone? Fine. Cut back on subsidies or altogether dump some other handsets.

    2. RESTRUCTURE DEBT. Taking on more debt is simply an awful idea at this point. Do as NXPI has and take aggressive steps to cut debt massively. It'll cause a short-run competitive disadvantage by slowing capital investment, but we're talking about survival mode here.

    3. REWARD INNOVATION. No idea is too crazy. Incentivize employees to get creative about developing low-cost products and services. Think about assets that could be sold or spun out.

    Others? If there's enough interest here, I'll write a follow-up piece on ways to rescue Sprint.

    FWIW and Foolish best,

    Tim

    --

    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst

    Web: http://timbeyers.me

  • Report this Comment On March 03, 2012, at 9:42 AM, motleyinfo7 wrote:

    Sprint is getting eaten right now by the MVNO spaces that is squeezing them from both sides first on the CDMA side PagePlus ( http://www.mypageplusactivaiton.com ) and on the GSM side by Simple Mobile ( http://www.mysimplemobile.me ) .

    They in charge is losing customers left and right with so many new options for the customers they have little space to acquire any new customers which was shown by their dismal 4th quarter results.

    They are in survivial mode right now and suffering greatly due to bad moves in the past that has left them limp and looking for anything that will wet their appetite including Metropcs.

  • Report this Comment On March 03, 2012, at 6:12 PM, 1984macman wrote:

    The iPhone will almost certainly be Sprint's saving grace. Sprint's come late to the game, but few recognize even now how huge a game-changer Apple is for them. Shorts lost their shorts betting against Apple, and betting against Sprint is just another way to bet against Apple.

    You've been warned.

  • Report this Comment On March 04, 2012, at 12:39 PM, mnosense wrote:

    Tim,

    You do realize Apple is a monopolyblood sucking, which asked its manufacture to reduce price even they only profit $5 on each iPhone. It only stole ideas from the others to label it as its innovation. Do you even understand what INNOVATION is?

    From your so call ideas to rescue Sprint, it won't suprise me that you were employed by Sprint. By whatever reason you were fired just hated the company.

    Of course it's your personal choice to promote Apple, but imagine how stupid it will be only iPhone available. Which is made for idiots like you only.

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