Has Sprint Nextel Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Sprint Nextel (NYSE: S  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Sprint Nextel.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(3.0%)

Fail

 

1-Year Revenue Growth > 12%

5.4%

Fail

Margins

Gross Margin > 35%

41.2%

Pass

 

Net Margin > 15%

(12.3%)

Fail

Balance Sheet

Debt to Equity < 50%

250.7%

Fail

 

Current Ratio > 1.3

1.46

Pass

Opportunities

Return on Equity > 15%

(40.0%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

2 out of 9

Source: S&P Capital IQ. Total score = number of passes. NM = not meaningful due to negative earnings.

Since we looked at Sprint Nextel last year, the company has finally made some progress, picking up a point after posting a score of 1 for two straight years. More important, the stock has more than doubled in the past year as a big new investor has sparked hope for Sprint to become more competitive.

Sprint has had a hard time as the third-largest U.S. wireless carrier. With increasingly sophisticated smartphones enabling users to achieve faster speeds, Sprint has struggled to keep up with the competition. Both AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) have superior LTE network coverage to Sprint, which is becoming more important as products like the iPhone 5 take more advantage of LTE.

But Sprint has captured its share of the smartphone market largely by giving users what they want: unlimited data. Both AT&T and Verizon have stopped offering unlimited plans, and as smartphones get more data-intensive, limits come into play more frequently. Sprint is also offering earlier model iPhone 4S smartphones through its Virgin Mobile unit on a prepaid basis, giving the company another vehicle to help satisfy its obligation to Apple (NASDAQ: AAPL  ) to meet a $15.5 billion minimum purchase requirement within four years.

For a while, Sprint mulled various moves to become more competitive, including the potential of buying MetroPCS (NYSE: TMUS  ) . But last month, Sprint made a game-changing announcement: Japan's SoftBank said it would buy a 70% stake in Sprint, spending $20 billion on the investment. It's unclear how the deal will affect Sprint's majority-owned partnerClearwire (UNKNOWN: CLWR.DL  ) , but it has the potential to vault Sprint back into competition in the fiercely contested wireless space.

For Sprint to improve, it needs to use the SoftBank capital infusion wisely. If it can use its unlimited data plans to its advantage and build up a viable network to compete with AT&T and Verizon, Sprint could easily get closer to perfection in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Sprint isn't the only company that is relying on Apple for its success. There is absolutely no argument that Apple is at the center of technology's largest revolution ever. However, there is a debate raging as to whether Apple itself remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Click here to add Sprint Nextel to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (1) | Recommend This Article (2)

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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 November 27, 2012, at 3:50 PM, nivegulu wrote:

    "The $5 billion Clearwire will pay its license holders for its spectrum over the next three decades is a bargain compared to what its rivals are paying. (Clearwire's $20 billion valuation of its spectrum may prove to be conservative; J.H. Snider, president of policy think-tank iSolon.org and former research director at the New America Foundation's Wireless Future Program, puts the number closer to $50 billion.) AT&T and Verizon bought their spectrum that can be used for 4G at government auction in 2008, paying a combined $16 billion."

    http://www.businessweek.com/magazine/content/10_22/b41800353...

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