Does Sprint Still Have an Edge?

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Since 2011, Sprint (NYSE: S  ) has climbed from a price of just above $2 to its current $8.75 a share. The company has thrived by striking a deal with Apple (NASDAQ: AAPL  ) for the iPhone and offering an unlimited service, giving it an edge over the likes of T-Mobile (NYSE: TMUS  ) and AT&T (NYSE: T  ) . But after such large gains, and with a changing landscape, does Sprint still have an investment edge?

A look back at history
If we look back at Sprint in 2011, it had falling subscribers, declining revenues, and a rising debt-to-assets ratio. Essentially, it was more primed for bankruptcy than a turnaround.

Also, the company had no answer for the iPhone, a product that, at the time, was nearly doubling in year-over-year unit sales as the hottest phone in the country. But with a $20 billion deal to carry Apple products, it began to see a boost in subscribers.

It also had an advantage with its service. Apple iPhone users are known to consume more data, and Sprint was the only carrier that offered an unlimited voice and data plan. Combined, the outcome made for massive stock gains and eventually a nearly 80% stake by telecom giant Softbank.

Has Sprint lost its edge?
Here's the kicker: Sprint may be losing its edge. Both AT&T and Verizon have since released more attractive plans, including bundles, and pay-as-you-go programs. This has posed as a major threat, and more importantly, the iPhone is no longer providing the spark it once did.

In Apple's last quarter, iPhone unit sales increased just 6.7% globally, far short of the near 100% growth it was producing in the year before Sprint's deal. While more than 55% of Apple's revenue still comes from the iPhone, the company has now shifted much of its focus away from the saturated Americas, and into China, where it owns a much smaller market share in smartphones, at less than 10%.

Apple's initiatives in China, including its deal with China Mobile, mean that much or most of its year-over-year growth comes outside North America. This means that the roughly 2 million added subscribers Sprint has added since the Apple deal may have reached a peak.

The one wild card
With service providers offering more competitive packages and the iPhone no longer the growth driver it had been, Sprint really has lost its investment edge.

The one wildcard might be T-Mobile.

It's well-documented that Sprint and Softbank are trying vigorously to acquire T-Mobile, as its no-contract plans and "un-carrier 4.0" initiative to attract the competition's subscribers have given the company a recent boost in subs.

Also, T-Mobile earns an industry-low $52 in average revenue per subscriber, which is one reason AT&T tried so hard to acquire it a couple years back. Sprint earns $63 per post-paid subscriber, which is high, and has very little room for growth.

While we can clearly see why Sprint would want to acquire T-Mobile -- T-Mobile's download speeds are also double that of Sprint -- the bigger question is whether regulators like the FCC will ever allow it. The FCC already shot down AT&T's attempted acquisition of T-Mobile, citing that it would hurt the free market. A Sprint and T-Mobile merger would combine the third- and fourth-largest nationwide carriers, but in addition, it would put two valuable spectrums and networks in the hands of a foreign company. A T-Mobile acquisition is a long shot, but important for Sprint's days of stock gains to continue.

Final thoughts
In spite of Sprint's large gains, the company still operates with more than $30 billion in debt, and a near breakeven operating margin of 0.26%. T-Mobile would improve the fundamentals of Sprint, as a company with positive operating margins of 4.7% and double-digit revenue growth.

The problem is that Sprint is unlikely to acquire T-Mobile, and given large losses within the telecom space, there are far better investment options. AT&T trades at just 1.3 times sales and 12 times next year's earnings with a dividend yield of 5.6%. In contrast, Sprint trades at one times sales, with no dividend. The slight premium for well-established peers -- and the problems that Sprint faces -- provides reason to be wary.

Simply put: Sprint has lost its edge, and it's unknown if the T-Mobile catalyst can become a reality.

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Read/Post Comments (4) | Recommend This Article (2)

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  • Report this Comment On March 24, 2014, at 1:34 PM, cloud4g wrote:

    The title is misleading/misplaced: What edge is Sprint supposed to have held previously?

    Five or six years ago before LTE was rolled out by every major competitor, it could be said that Sprint had a window of opportunity to create an edge in higher bandwidth pre-4G networks. That edge lapsed about three years ago. Even while the Clearwire-Sprint relationship was still active, it had failed to live up to early projections for marketshare growth, having reached a little over 11 million Sprint co-network subscribers and not having prevented Sprint from losing overall subscriber counts to Verizon and AT&T. Therefore, any edge Sprint once had was only a sub-network part of the overall service business, not a 'Sprint edge'.

    Looking forward, does Sprint have an edge now that the deep pockets and technical prowess at exploiting 2.6GHz spectrum of Softbank/Son is brought into play? Only in the sense of unexecuted potential. Meanwhile, competitors Verizon, AT&T and T-Mobile are further along in deploying LTE into wider bands of new spectrum than the nascent scenario of years past.

    The challenge for Sprint-Softbank remains overcoming the higher cost of deploying into the higher frequency/shorter range and in-building penetrating 2.6GHz spectrum. Its clear that wireless technology cannot change the basic laws of physics that determine how coverage-bandwidth will deliver QoE, quality of experience that determines customer satisfaction and growth.

  • Report this Comment On March 24, 2014, at 3:54 PM, BrianNichols wrote:

    I very notably and publicly called Sprint the best value of 2012. I stated it in article-after-article as Sprint traded below $2.50, and for much of 2012 it traded below $3 (although most don't remember). My entire thesis for why Sprint presented soooo much value was that it had the unlimited plan and it had the iPhone.

    Sprint fell to near bankruptcy without being able to compete with VZ and AT&T while the iPhone was the hottest and most sought product around. Sprint had too many locations, too much debt, not enough revenue, and most importantly, a rising debt-to-assets ratio.

    But, with the iPhone, my thesis was that Sprint could then compete with the likes of T and VZ by offering the one thing they didn't have, unlimited data. Today, iPhone growth is slowing and carriers have more competitive plans. Thus, "my edge" that I gave to Sprint no longer exists, and long-term I think it equals a declining stock once the T-Mobile deal is (likely) declined.

  • Report this Comment On March 24, 2014, at 11:09 PM, ecbatana wrote:

    The problem with your analysis and those of most analysts is you base most of your investment decisions on the Trailing 1 to 5 year Metrics. However, IMHO this is a myopic approach with limited results.

    With a little prescience and due diligence one can easily turn downtrodden stocks into ten baggers. A case in point is Sprint, the so called analyst just can't understand why Sprint has taken another glide path heading north.

    Did you ever take into consideration the Clearwire spectrum they bought in the latter part of last year? How about the fact that they now have the wherewithal to build out their network by replacing every nail, screw, nut and bold in their network, resulting in a Tri-Band network capable of roaming on what is becoming the world's standard platform, TDD LTE, which is being designed for TDD LTE Advanced, capable of 180 Mhz down load speeds with plenty of capacity from its recent acquisition of Clearwire's 130 Mhz of spectrum.

    Last but not least, can someone tell me how TMUS has any long term advantages over its rivals, such as Sprint, Virgin or Boost? Virgin and Boost don't require contracts and you can get a Boost Mobile phone for $35, the same is true for Virgin. On a Sprint Framily plan you can get a phone for $25 per month with the bills being sent to each member on the plan respectively.

  • Report this Comment On March 24, 2014, at 11:28 PM, ecbatana wrote:

    Keep in mind that Clearwire was no more than a liability for Sprint for many years before Softbank purchased the remaining 50% of its shares. With the technology of today (pico & nano cells) from the likes of ALU and the resources of Masayoshi Son, Sprint's Chairman. You would be a fool to discount his abilities. Just look at what he did in Japan and how he was able to use the 2500 Mhz platform to conquer NTT Decomo and KDDI to become the most profitable telecom in Japan.

    Did you ever look into his assets, which by the way manifests the largest (37.6%) ownership of Alibaba Group. The company currently has twice the revenue of Amazon (market cap of approx. $165B) and substantially more earnings which IMHO would place Alibaba with a market cap north of $300 Billion.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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