How Can Sprint Be Rated "Outperform"?

The deck is stacked against Sprint Nextel's (NYSE: S  ) survival. At least that's the way I see it. So I was quite surprised to read that RBC Capital Markets had upgraded Sprint's rating late last month to "outperform."

That reappraisal came about from several RBC assumptions:

  1. An expectation that Sprint will gain postpaid subscribers in the second half of 2011, turning around the company's losing performance in the first half.
  2. The probability that Sprint will get the iPhone.
  3. A whittling down of its money-losing iDen push-to-talk service (acquired with the 2004 Nextel purchase) while transferring to Sprint's own CDMA network – but not until 2013, at least.
  4. A belief that AT&T's (NYSE: T  ) acquisition of T-Mobile will actually improve Sprint's position.

Back to reality
Let's address each of those four points.

  1. Expectation" should read "hope."
  2. Even if it was definite that Sprint would get the iPhone, unless the Sprint network could add extra value to the iPhone experience, why would subscribers switch carriers?
  3. Sprint's rationale for buying Nextel -- besides adding subscribers, of course -- was to create efficiencies of scale by merging both companies' networks. Instead, merging Sprint's CDMA and Nextel's iDen networks was a complete mess, and the ensuing inefficiencies caused massive subscriber losses. Will Sprint even still be around in 2013 for the new push-to-talk network?
  4. Let me see if I understand this: With T-Mobile no longer there as Sprint's main low-price rival, the pressure to add subscribers just disappears? No, I think that's when the pressure to add subscribers increases quite a bit.

That last bit reminds me of a scene from Monty Python and the Holy Grail. The Black Knight blocks King Arthur's way until Arthur chops off the Knight's last remaining limb.

Black Knight: "I'm invincible!"
Arthur: "You're a loony."

Alternative business plans
With AT&T and Verizon (NYSE: VZ  ) likely to become the only viable major wireless carriers in the United States if the AT&T–T-Mobile merger goes through, Sprint's situation becomes more dire. I see only three alternative scenarios that may benefit Sprint.

  • First, the AT&T merger is rejected. AT&T and Verizon will keep battling each other, and Sprint and T-Mobile fight over the scraps.
  • Second, the merger is rejected and Sprint merges with T-Mobile. This would create a more viable third major carrier -- though headaches caused by differing technologies would once again limit the effectiveness of such a deal.
  • Third, the merger goes through but then Sprint is acquired by Verizon. I don't think this would benefit the consumer.

The only thing I can't see happening is a company like Sprint Nextel, with 14 straight quarterly losses and a weak outlook, getting an upgrade from any brokerage. But then I'm not a Wall Street analyst.

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Fool contributor Dan Radovsky owns shares of AT&T. Motley Fool newsletter services have recommended buying shares of AT&T. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (7) | Recommend This Article (6)

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 August 17, 2011, at 2:04 AM, socal92081 wrote:

    Unlimited Data, is the value that Sprint would and will add for the iphone. The fact America would prefer a multiple choice Cell carrier (i.e 3+ national carriers) then a True or False question (Verizon and ATT) where either way your wrong.

  • Report this Comment On August 17, 2011, at 6:41 AM, feliper17 wrote:

    Are u serious, sprint nextel did loose subscribers this quarter but it also added 1million new subscribers! i dont understand the need to focus only on the negative. it also signed a multi year deal with lightsquared giving it more capital, and also shown that it is a great value for customers. how can someone be surprised. sprint has shown again and again during the past quarters that it can gain subscribers more than it loses.

  • Report this Comment On August 17, 2011, at 6:57 AM, shmanders94 wrote:

    I've been using sprint for a while now. I really don't think they're as bad as this article makes them out to be, or any other person for that matter. Most of the time the people who diss sprint haven't even used their services. Which makes me wonder if this article is just being completely ignorant to sprint's services.

  • Report this Comment On August 17, 2011, at 8:49 AM, kcchukcie wrote:

    Feliper17,

    Please go back and read the statment about the losses again, he was not talking about subscriber losses but rather quartly earnings, which once again was around 750M. 14 quarters posting losses like that and the onset of their "vision" plan that will cost an additional 4-5B will the investors see any earnings over the next few years?

    The Lightsquared deal is a perfect example of one bad decision after another. Why would Sprint want to compete with itself seeing how it uses Clear as its 4G service provider and owns more than 50% of the company? A deal that is totally null and void if Lightsquared cannot get the required approvals.

    My belief in the long run is that Sprint will be the perferred network of MVNO providers and nothing else, move over Cricket and Metro your going to have company.

  • Report this Comment On August 17, 2011, at 8:49 AM, siriusdaytrader wrote:

    LoL this article is a joke maybe you should do a little more research into S. Sprint to $5.80 by December mark this post shorty. ;-)

  • Report this Comment On August 17, 2011, at 9:54 AM, pulease wrote:

    Hey Dan, RBC is kicking your butt. Are you watching? that's an 11 percent jump in 2 days! They're the 2nd biggest gainer on the S&P today.

  • Report this Comment On August 17, 2011, at 10:47 AM, mnosense wrote:

    Read carefully. This guy owns AT&T, which explains everything.

    He can not see the problems in AT&T, its debts is growing quarters after quarters. That's deficit spending. Subtract the increased debt amount, AT&T is negative. Soon it will be crushed under the matured debts.

    On ther other hand, Sprint is paying off the debts quarters after quarters.

    Oh, I forgot this site is a collection of all the fools.

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