Is Leap Wireless Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Leap Wireless (NASDAQ: LEAP  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Leap's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Leap's key statistics:

LEAP Total Return Price Chart

LEAP Total Return Price data by YCharts.

Criteria

3-Year* Change 

Grade

Revenue growth > 30%

26.6%

Fail

Improving profit margin

(10.8%)

Fail

Free cash flow growth > Net income growth

38% vs. 21%

Pass

Improving EPS

25.8%

Pass

Stock growth (+ 15%) < EPS growth

(68%) vs. 25.8%

Pass

Source: YCharts. *Period begins at end of Q4 2009.

LEAP Return on Equity Chart

LEAP Return on Equity data by YCharts.

Criteria

3-Year* Change

Grade

Improving return on equity

(156.7%)

Fail

Declining debt to equity

369.8%

Fail

Source: YCharts. *Period begins at end of Q4 2009.

How we got here and where we're going
It hasn't been a particularly good three years for Leap, which has all but leapt (pardon the pun) off a cliff with its share price. Free cash flow and net income have both been moving in the right direction, but only from a deep hole to a slightly shallower hole. What will it take to get this second-string telecom into the market's starting lineup?

My fellow Fool Sean Williams just doesn't see that happening. A de facto duopoly in AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) crowds out smaller competition, especially when you consider that both Sprint and T-Mobile have recently enhanced themselves -- the former with a sale to SoftBank and the latter with a purchase of MetroPCS.

Leap picked up Apple's (NASDAQ: AAPL  ) iPhone for its prepaid plans, and a $900 million minimum purchase commitment at first seemed easily reachable, as the company figured only about 10% of its subscribers will need to pick up the iPhone to make this deal work. That might be less likely that originally thought, as the company's only on track to move half as many iPhones as it expected through the first half of 2013. Between this shortfall and a smallish subsidy, Leap is in a difficult position should it be unable to move Apple's phones at a faster pace.

One backup option is Samsung's Bada operating system, which seems poised to become the would-be Symbian of the smartphone era -- a low-cost option for commodity phones. Since prepaid plans tend to attract value-seekers, this might be enough to keep Leap afloat as the AT&T-Verizon duo continue to secure the upper tier of the market. If worst comes to worst, Leap is worth less than $500 million -- either of the big two could gobble it up without a second thought, should they be so inclined.

Putting the pieces together
Today, Leap has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple 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.


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