Sprint Nextel: More Pain, No Gain

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If there was any doubt that things could get worse at Sprint Nextel (NYSE: S), the company answered with a resounding "yes" today. Preparing investors for more pain, the company preannounced subscriber losses, as well as a round of layoffs and retail shop closings aimed to cut costs, prompting investors to quickly slice more than 25% off Sprint Nextel's share price.

Sprint Nextel cut right to the chase and painted a gloomy fourth-quarter picture: Despite subscriber gains in wholesale and affiliate channels, as well as its new Boost Mobile unlimited offering, the company said goodbye to 683,000 of its most lucrative, post-paid subscribers. It also lost a net 202,000 prepaid subscribers.

As I had suspected, the picture for the balance of 2008 doesn't look good either. The company flatly stated that it anticipates "continued downward pressure on subscriber trends, revenues, and profitability" for the coming year. Basically, it's going to stink being Sprint Nextel for a while.

The only silver lining I could find in the company's warning was a sequential improvement in the customer churn rate for its post-paid customers on both the Sprint and Nextel networks. The higher level of defections that led to net losses came from involuntary churn -- those customers that Sprint Nextel chose to cut off. It appears to me that newly minted CEO Dan Hesse has chosen to take the short-term hit this quarter by disconnecting unprofitable customers and closing poorly performing stores, so kudos on that front.

So it's now clear that Sprint Nextel took it in the shorts this holiday season from iPhone-emboldened AT&T (NYSE: T) and Verizon Wireless, a joint venture between Verizon Communications (NYSE: VZ) and Vodafone (NYSE: VOD). Now I know that my suspicions -- from back in November, when the company gave a veiled admission that the stock would drop further -- were right on.

The main question now for value investors eyeing shares of Sprint Nextel is this: How many more customers will the company lose before stabilizing the business? I have to admit that while I pooh-poohed the stock at $13 per share just a few weeks ago, the $8.50 price that is showing as I write is much more enticing, even with today's gloomy update. For those on the sidelines, now's a good time to update your models and reconsider Sprint Nextel as a turnaround play.

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