Sprint Nextel (S) is the nation's third largest wireless carrier by number of subscribers at 56 million. AT&T (T) has a steady 105.2 million, and Verizon (VZ) has 94.2 million. Sprint, having allowed Japan's Softbank to buy a controlling stake of 70% for $20 billion, is now in the headlines for trying to acquire PC spectrum and customers from U.S. Cellular (USM) in parts of Illinois, Indiana, Missouri and Ohio. The deal values U.S. Cellular's assets at roughly $480 million in cash and the assumption of certain liabilities.
Sprint Nextel is attempting to deploy its network division upgrade in the areas mentioned above as well as roll out 4 G LTE across the nation. I believe Sprint is trying to recover from the past three quarters and position itself as a stronger competitor to its two biggest rivals. Though Sprint has seen five straight years of losses, I believe the stock price at around $6 per share could increase in the next few years on the strength of its reorganization after the Softbank deal.
A few weeks ago, Sprint reported its third quarter result that showed revenues of $8.7 billion, up 5.2% on the year. The company however reported a net loss of $767 million, or $0.26 per share, ending the quarter with $6.3 billion in cash equivalent and short term investments. It has $21.3 billion in debt outstanding, for a net debtor position of $15.0 billion. It reported a $3 billion net loss for the first nine months, on track to report annual losses close to $4 billion.
Over the past five years, shares have fallen over 65%. Reporting multi-billion dollar losses over the past few years, it struggles to compete with its rivals due to its debt load and the intense competition. It has funneled resources into building its 4 G network and tries unsuccessfully to cope with the cost of running two incompatible networks, making its customers leave for AT&T and Verizon.
I understand Sprint's challenges. Its larger competitors have strong financial resources while Sprint has only just started its rollout with its LTE coverage in all 32 metropolitan cities. Verizon has its LTE available to more than 250 million Americans in close to 420 markets across the U.S. AT&T offers LTE in as many as 77 U.S. markets to over 80 million Americans and plans to almost double its reach by year-end. It has set aside $14 billion to overhaul its network, including an upgrade to the latest cell phone data standard, motivated by the newly emboldened company and AT&T's failed $39 billion takeover of T-Mobile. AT&T hopes its initiatives expand its reach.
But I also feel that Sprint Nextel's deal with Softbank and its other policies would create shareholder value in the next few years. It hasn't taken long for Sprint to put the recently acquired cash from Softbank to use. Aside from the U.S. Cellular deal, it announced its intention to redeem a portion of 2014 debt maturities with an aggregate principal amount of $1 billion on Nov 9th. It plans to redeem the rest of the 2015 debt maturities with another $1 billion in Nov 2013.
Sprint has long been part of the rat race with Verizon and AT&T to upgrade its network, which is under the strain of increased data usage. It wants to get network capacity that not only improves its competitive standing among its rivals but also helps it augment its LTE build out. It is aggressively executing its Network Vision strategy to get most of its 4G LTE network ready by the end of 2013, trying to phase out iDen gradually and concentrating its network holdings into one network using CDMA and EV-DO. It wants to shut down its iDen network completely by next summer and use the freed up spectrum to boost its LTE network in 2014. To strengthen its network with capacity for both 4G and 3G, it plans to use the acquired spectrum from U.S. Cellular to provide better service to customers.
Specifically, Sprint will acquire 20 Mhz of spectrum in Midwest markets, increasing its network and improving customer experience. The transaction includes approximately 585,000 customers. The spectrum acquisition could add over half a billion dollars in annual revenue if the deal receives regulatory approval and all U.S. Cellular customers migrate over to Sprint's $79.99 unlimited per month plan.
Sprint Nextel, as a sign of its resurgence, is offering wireless and wire line communication products and services to individuals, businesses, government subscribers, and resellers in Puerto Rico and the United States Virgin Islands. Analysts say Sprint's strength can be seen in multiple areas, such as solid stock performance, revenue growth, and good cash flow from operations. Another team of analysts from Argus called on investors to buy Sprint in mid October.
I believe that at its current price around $6 per share, Sprint Nextel could prove to be a solid investment with a potential to increase in the long run. The company is reinventing itself. AT&T and Verizon could be ahead of it, but the current reorganization in Sprint is promising. It will catch up with its rivals in time. Its gross margin is 0.41, the same figure as the industry average. At a price-to-sales ratio of 0.49, the same as the industry average, it is cheap. Though its operating margin at -0.04 is poor, the company is positioning itself for growth. Its earning-per-share is also poor at -1.44, but the company should be given time to complete its overhaul.
In the next few years, Sprint's steady progress in building out its 4G LTE network will enable it catch up with AT&T and Verizon, especially because Sprint now has Apple's (AAPL) widely popular, cutting-edge iOS devices consisting of the iPhone, smartphone and the iPad tablet. Investors will have a solid investment in their portfolio if they buy Sprint.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.