Does LTE Network Growth Justify Buying Sprint?

| About: Sprint Corporation (S)

Sprint Nextel (NYSE:S) recently announced that it would launch an official LTE network in nearly 150 new markets in the coming months, including 36 markets that were added recently. Sprint's goal is to better meet the needs of its wireless customers. Unfortunately, Sprint's investment in infrastructure has not succeeded in enabling the company to trade at price multiples beneficial to investors. The growth stories surrounding Sprint's investments in its wireless network may not improve its price multiples for sometime. Investors should be aware of this when considering Sprint as an investment.

In the third quarter of 2012, Sprint reported a year-to-date operating loss of $1.1 billion, compared to the same period year-to-date operating loss of $546 million in 2011. The company reported a year-to-date net loss of $3.0 billion, compared to a 2011 year-to-date same period net loss of $1.5 billion, an 89% increase. Its diluted year-to-date net loss per common share was $1.0, compared to $0.53 for the same period in 2011.

Why is Sprint's investment in its wireless network not increasing sales?

Sprint attributes this to its focus on preserving as many customers as possible rather than attracting new customers. The net loss is also driven by accelerated depreciation of $397 million tied to the expected shutdown of the Nextel platform. Also, Sprint continues to lose subscribers, suffering a net customer decline of 456,000 in the third quarter of 2012, which was worse than the loss of 361,000 that analysts polled by Reuters had projected.

Earlier this year, Sprint invested in improving its total network quality and performance. It launched 4G LTE in five markets and 15 cities in July. It also implemented 3G service improvements in more than 70 markets.

Sprint's platform postpaid subscriber base grew for the tenth consecutive quarter in the second quarter of 2012, driving Sprint's wireless service revenue growth of 16% year-over-year. The company also achieved its best ever platform postpaid churn of 1.69% and witnessed strong iPhone sales of nearly 1.5 million. However, free cash flow was $209 million for the quarter, compared to $267 million for the second quarter of 2011 and $138 million for the first quarter of 2012. Operating loss was $629 million compared to operating income of $79 million for the second quarter of 2011 and an operating loss of $255 million for the first quarter of 2012. The company reported a net loss of $1.4 billion and a diluted net loss of $.46 per share for the second quarter of 2012 as compared to a net loss of $847 million and a diluted net loss of $.28 per share in the second quarter of 2011.

Sprint continued with its investments to cater to the needs of its wireless customers. It expanded its all-new 4G LTE network service to cover more markets, including Dallas, Houston, Atlanta, and Baltimore. It implemented 3G service improvements in many markets. It improved on Network Vision, enhancing voice quality and making customers see better performance on their Smartphone, mobile broadband connection card, and mobile hotspots when using 4G LTE and 3G.

In the third quarter, Sprint's postpaid subscriber base grew with net additions of 410,000. The company recorded approximately 1.5 million iPhone sales in the quarter, with 40% representing new customers. Sprint also surpassed 1 million LTE Smartphone sales prior to the launch of iPhone 5. However, overall customer numbers dipped by 423,000 to55.96 million, compared with 56.39 million same period the year prior. The company suffered a net loss of $767 million compared with $301 million same period the prior year.

Sprint's plan to launch its official LTE network in the coming months is understandable. Fast-speed through LTE networks enable instant web access for new updates, HD viewing and game playing, quicker video downloads, and clear video chats. It also allows Sprint's customers to experience fewer dropped calls and improved voice quality.

However, if we relate Sprint's investment in wireless deployment to successive financial statements, it is noticeable that Sprint's net loss is increasing in comparison to 2011. In addition, the number of total customer is falling, so it can be said that Sprint is not operating at an optimum efficiency level.

How is Sprint performing compared to its rivals? With earnings per share (EPS) of -1.44, compared with AT&T (NYSE:T) at 0.76, Verizon (NYSE:VZ) at 1.08, CenturyLink (NYSE:CTL) at 1.05, and Windstream (NASDAQ:WIN) at 0.24, and gross margin at 0.41%, compared with 0.55% for AT&T and 0.60% for Verizon, it does not appear that Sprint is ahead of the others. And it must be noted, Sprint is burdened with a heavy debt load. Looking at its successive investments in its wireless network and the worsening margins, I believe that investors should avoid buying Sprint for now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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