Sprint (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 (T 1.10%) and Verizon Communications (VZ 0.90%) 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.
