Why You Should Sell Sprint

Sprint (NYSE: S  ) announced financial results that beat expectations by nearly every measure. Revenue of $9.142 billion beat consensus of $8.971 billion by $171 million. Earnings per share of -$0.26 were ahead of consensus of -$0.33 by $0.07. Subscribers were $53.9 million and smartphone sales accounted for 95% of the new postpaid customers. Sell side analysts have been updating their models and highlighting the Enterprise Value to EBITDA multiple to justify their buy ratings but individual investors should be wary. Looking beyond the quarter, the investment characteristics of Sprint are weak.

Sprint's growth business isn't growing
Wireless subscribers have been the bread and butter for the telecom business since customers started cutting the cords a decade ago. The growth contribution initially came from growing mobile subscribers then converting those subscribers to higher margin voice/data plans. Unfortunately, mobile appears to be largely tapped out for Sprint with a slight wireless subscriber decline and 95% of postpaid customers already buying smartphones leaving little room for growth in pricing. Making matters worse, this includes the subscribers from the recently acquired Clearwire and US Cellular businesses.

Lack of a dividend
Whether you're a growth investor or income investor, the presence of a dividend helps dampen a stock's downside when the outlook gets darker. Since Sprint is the only major telecom to not offer a dividend, this puts shares at a substantial disadvantage to AT&T  (NYSE: T  ) and Verizon Communications  (NYSE: VZ  ) which are offering yields of 5.7% and 4.5% respectively.  

So there's no growth and there no income, at least its stable.  Well, not exactly.

The pricing war is beginning
AT&T cut pricing on its plans for families that use four smartphones in early February.  The revised pricing plan reduces the monthly expense from $200 to $160 and seems to be aimed at Verizon which charges $260 for a similar plan.  Both AT&T and T-Mobile have been offering credits of $450 as an incentive to switch carriers.  Not leaving the handsets out of the competition, both AT&T and Sprint offered new customers an iPhone 5s for $100 when signing a two year agreement.  Verizon, on the other hand, has been vocal about wanting to keep out of a pricing war but cut its $35 activation fee for new customers who sign up between February 10 and February 17.      

Sprint can't be acquired or stop its network build out
When Softbank acquired the 70% interest in Sprint, it promised the FCC that it would remain a separate CDMA carrier and, in time, become an all-LTE carrier.  Prior to the acquisition, the plan was to complete the roll out by 2017 and whether the company holds to this exact time frame or not, the project involves significant capital expenditures. This agreement seems to lock Softbank into a massive multi-year network expansion.  Shareholders could be stuck owning minority interest (30%) of a company that can't match its costs with revenues.

Valuation is tough to justify
The only way analysts have been able to make sense of the valuation is through Enterprise Value to EBITDA. However this ignores two important realities of the telecom business, equipment wears out and the company has to pay debt. Sprint has $32 billion dollars of debt on its books but analysts back out the amortization of the debt payments. Even worse, the depreciation of equipment is backed out yet Softbank is going ahead with a muti-year LTE build out. However, these issues haven't stopped the Barclay's analyst from maintaining the firms $9 price target  or the Wells Fargo analyst from touting the expanding EBITDA margin. 

Use the stocks strength as an opportunity to sell
While Sprint offers a high quality service for its customers and arguably the best nationwide data plan available, the shares have no basis for their current price and individuals should use the name as a source of funds. There's no growth or income benefit from owning shares and the valuation used to justify sell side price targets omits some large reinvestment costs that are necessary in a capital intensive business.  This issue could receive greater scrutiny if the price war that has been brewing increases its ferocity.  There are just better places to put your money.

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Read/Post Comments (9) | Recommend This Article (2)

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 February 13, 2014, at 12:03 AM, LowellUkulele wrote:

    Don't forget that Verizon and AT&T continue to offer the highest-priced wireless plans in America without unlimited data. As more Americans begin to notice their high wireless bills, we may see more of a swing to Sprint and T-Mobile.

  • Report this Comment On February 13, 2014, at 6:56 AM, efg2 wrote:

    Great point mr. Kulele

    Why is it that all of the Articles about Sprint, fail to point out the One thing. Sprint is building a completely new, Nation Wide uptodate Wireless service that when completed, (and they are far from Totally finished) will be the fasted 3x to 10x, and will have HD voice. Now is that something you want to invest in. Sprint has paid down Debt basicly till the end of 2016. Plus, Sprint will have Positive Earnings this year 2014. This is unprecedented in any business. This is information, that all of wall street knows by now. yet you claim not to? Mr. Son said it best after the Call, " We do not need T-Mobile. "We will build a service that will compete with VZ and T. " Also saying he doesn't like being 3rd. place in any of his businesses. Investors, do your homework, and base your investment decisions on your own findings.

  • Report this Comment On February 13, 2014, at 11:45 AM, navarac4301 wrote:

    Sprint has been the "go to company" when it comes to bashing lately. This company has so much growth potential, and its taking advantage of it. I have been with Sprint for over 10 years, and with the current plan pricing from the competitors, I would, Honest to the almighty, pay 113% more. The best thing Sprint did was introduce the unlimited data and keep it, that alone will bring in customers who's kids are going over every month, I know my wife would go over in just the music listening alone. The introduction of the I-phone, another great play. I am LONG in Sprint for one major reason, THEY HAVE THE FINANCIAL BACKING TO DO AS THEY PLEASE. Softbank CEO is not happy being 3rd, nor 2nd place, said so himself, and will not be happy until he is completely adequately competitive with the big 2, which I know he will not rest until the T-mobile deal is done. Or he will keep buying smaller companies. Maybe he should go after more of US Cellular's markets.

  • Report this Comment On February 13, 2014, at 3:18 PM, wholesalecd wrote:

    Your reasoning wasn't very adequate to justify selling. I'll stick with the pro's and the market.

  • Report this Comment On February 13, 2014, at 4:06 PM, wholesalecd wrote:

    Buy when Motley Fools writers are fearful.

  • Report this Comment On February 13, 2014, at 7:48 PM, ramsfan310 wrote:

    yeah! Sprint only went up 4.21% today....

  • Report this Comment On February 14, 2014, at 8:25 AM, gerard6656 wrote:

    David there are some other points worth considering. Call me in area code 303. G

  • Report this Comment On February 15, 2014, at 4:57 PM, bonhead wrote:

    motley fool .Bunch of Idiots lies .No one should read this garbage articles. .No reason to read. We all know how credible they are .At least by now

  • Report this Comment On February 15, 2014, at 5:39 PM, bonhead wrote:

    No one has paid attention for fool .You know the reason .

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