Sometimes an Underdog Deserves to Be Put Out of Its Misery

Betting on an underdog sometimes can provide a huge gain. However, sometimes an underdog is that for a very good reason and deserves to be put down.

Feb 24, 2014 at 7:00PM

So, you're thinking about buying an underdog, looking for a big gain. You keep telling yourself, "it can't go any lower" or "if it goes up just $2, I can make 25%." You can almost feel these types of thoughts from shareholders of Sprint (NYSE:S).

The bad news is, sometimes an underdog deserves to be put down. In fact, there are at least three reasons why Sprint may not come back.

Wire-less for sure
Of the three largest carriers; Sprint, AT&T (NYSE:T), and Verizon (NYSE:VZ), Sprint is the only one to report net losses of postpaid subscribers last year. Let that sink in for a minute.

Sprint may boast nearly 54 million subscribers, but just under 31 million are postpaid. The remainder are a combination of prepaid and wholesale customers. The reason postpaid subscribers are important is, their average revenue per account is more than double that of prepaid customers.

Considering that Sprint only added 58,000 postpaid subscribers last quarter, this is cause for concern. However, when you compare this with the 566,000 postpaid additions at AT&T or the 1.6 million postpaid additions at Verizon, it looks much worse.

It's true that both AT&T and Verizon boast much larger subscriber bases than Sprint, but that's the point. If you are in third place and you only add a few new subscribers, how do you plan to compete with the big boys? Given that Sprint gets about 80% of its wireless revenue from postpaid subscribers, adding fewer subscribers than its peers is just the first big problem facing the company.

This should churn your stomach
Clearly, Sprint has an issue when it comes to growing its postpaid subscriber base, but the company's churn rate is an even bigger problem. In the simplest sense, the higher a company's churn rate, the harder it is to grow its user base.

In the current quarter, Sprint reported a postpaid churn rate of 2.15%. By comparison, AT&T's churn rate was just 1.1% and Verizon's churn rate came in at 0.96%. If all three companies had the exact same number of subscribers, Sprint would lose almost double the number of subscribers as AT&T and more than double that of Verizon.

Considering Sprint already has less postpaid subscribers, a churn rate that is much higher than its peers is a huge problem.

Remember when Softbank was supposed to solve everything?
When Softbank took a multi-billion dollar stake in Sprint, some suggested this was the end of Sprint's financial woes. The international company would give Sprint enough money to compete more effectively with the likes of AT&T and Verizon, and a strong third wireless carrier would emerge.

But that's not what happened. Sprint hasn't been able to generate consistent positive free cash flow, and carries about $25 billion in long-term debt. If you expect the company to turn cash flow positive anytime soon, think again.

In the current quarter, Sprint generated $843 million in negative core-free cash flow (net income + depreciation-capital expenditures). Consider that in the last year, AT&T and Verizon generated over $16 billion and $23 billion in core-free cash flow respectively.

What's extremely disturbing is Sprint is forecasting an $8 billion capital expenditure budget for 2014. In the last three months, the company spent about $1.7 billion in capex, so the budget suggests an increase.

The third major issue facing Sprint is its operating income will have to more than double, to meet the company's interest expense on a quarterly basis. With AT&T and Verizon spending less than 12% of their operating income on interest, there is a cavernous difference between the three companies.

To make a long story short
The bottom line is, Sprint has a huge pile of debt; it isn't growing its most profitable subscribers; and it has a churn rate that is nearly double the competition. Sprint isn't just an underdog, I think it's a dying company and deserves to be put down.

Is a carrier the real winner of the smartphone phenomenon?
Want to get in on the smartphone phenomenon? Truth be told, one company sits at the crossroads of smartphone technology as we know it. It's not your typical household name, either. In fact, you've probably never even heard of it! But it stands to reap massive profits NO MATTER WHO ultimately wins the smartphone war. To find out what it is, click here to access the "One Stock You Must Buy Before the iPhone-Android War Escalates Any Further..."

Chad Henage owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers