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In the horse race to control the U.S. telecommunications market, Sprint Nextel (NYSE:S) is running a distant third to Verizon (NYSE:VZ) and AT&T (NYSE:T).

Some investors are bullish on this slow horse, however, pushing the share price to more than double in the past year to just under $6.

Big Changes

Sprint is in the midst of two major transactions, one an acquisition and one the sale of a major share of the company.

In December, Sprint announced a deal to buy the remaining 50% stake in Clearwire Corporation (CLWR) that it already doesn't own. The plus for Sprint is obtaining Clearwire's spectrum assets.

More critical is the acquisition by Japanese bank SoftBank (OTCPK:SFTBY). Sprint announced last year that the bank plans to acquire a 70% stake. The bank will pay $8 billion to acquire newly issued shares and $12.1 billion for existing shares. Sprint will use the $8 billion largely to continue its much needed network upgrade.

Without that funding, Sprint would have to finance the upgrade through debt, which has already grown to $24 billion at the end of 2012; that's 2 1/2 times its current equity.

The Competition

And Sprint needs to spend the cash if it has any chance of competing in the current wireless duopoly. In 2013, AT&T is expected to spend over $12 billion on its wireless network, roughly 30% more than competitor Verizon and 176% more than Sprint, which is already playing catch up when it comes to network strength. While the former two have 4G-LTE network access in 200 and 476 markets, respectively, Sprint has 4G coverage in only 58 cities as of early February, though it anticipates 170 additional cities in the coming months.

Meanwhile, between 2009 and 2013, AT&T is projected to spend $57 billion cumulatively, compared with $54 billion at Verizon, $17 billion at T-Mobile and just $14 billion at Sprint.

Finances

Sprint's major capital expense is its Network Vision project, aimed at dismantling the former Nextel's antiquated 2G platform in favor of new 4G.

But the company is limited in how much it can allocate to the project. In addition to the aforementioned heavy debt load, Sprint lost more than $4.3 billion in 2012, and has lost roughly $16 billion over the past five years. Analysts are projecting another $2.5 billion in losses for 2013 before a possible breakeven year in 2014.

Sprint's annual revenues have risen steadily over the last four years, though still not near the $41 billion during its peak of 2007. Sprint is stuck in a classic chicken-egg dilemma: Sprint will need its network upgrade to work, so the company can boost revenues. But it needs the extra revenue so it can perform the necessary upgrade work.

The news isn't all bad for Sprint. Highlights of its fourth quarter earnings report included:

  • A slight increase in quarterly revenue from $8.7 billion in 2011 to $9 billion in 2012, the latter of which beat analysts' estimates of $8.92 billion.
  • Though Sprint suffered a higher quarterly loss of 44 cents a share, it was less than the 46 cents a share that analysts had anticipated.
  • The firm enjoyed its best-ever quarter of iPhone sales, selling 2.2 million of the popular devices, 38% of which were sold to new customers. During 2012, Sprint sold more than 6.6 million iPhones, with 40% going to new customers. In total, Sprint sold almost 20 million smartphones in 2012.
  • Sprint reported record quarterly wireless revenue of nearly $7 billion. The company's postpaid subscriber base grew for the eleventh consecutive quarter with net additions of 401,000.
  • During 2012 Sprint launched 15 4G LTE devices, including Apple (NASDAQ:AAPL) iPad mini and iPad with Retina Display, LG Optimus G™ and Samsung Galaxy Note ® II.
  • Wireless service revenues for the Sprint platform grew 12 percent year-over-year for the quarter and nearly 15 percent for the full year.

Overall, it was a mixed quarter for Sprint. The company was able to sell 2.2 million iPhones in the period, up from 1.8 million in the prior year period. While the unit sales number was a quarterly record, only 38% were sold to new customers, and that was a quarterly low for the company. Also, if you go back a year, the iPhone 4S didn't go on sale until mid-October. Thus, there weren't as many selling days for that phone as there were this year for the iPhone 5, which went on sale in late September.

The Positives

One advantage Sprint has over the other two major carriers is what it charges customers for unlimited text, talk and data services on iPhones. AT&T and Verizon both charge about $130 for their services, compared with around $80 for Sprint's service.

Sprint also leads the prepaid market, which is also known as pay-as-you-go services. Though not as lucrative as the regular post-paid contracts more widely used by wireless customers, it does give it greater access to customers who want the privilege of owning a smartphone but who don't want the monthly expense of unlimited data.

Some analysts also expect free cash flow to increase this year by completing the Network Vision project and shutting down the Nextel network, which will save $1 billion to $2 billion in annual operating expenses.

They also point out that Sprint's wireless revenue growth rate in the first nine months of 2012 exceeded Verizon Wireless's revenue growth. Sprint's wireless revenue growth rate has also exceeded AT&T Mobility's wireless revenue growth rate in the last three quarters, and it has also exceeded AT&T Mobility's wireless service revenue growth rate for the last five quarters.

A Surprising Pick?

Unlike a horse race, you don't invest so much on what already happened as much as what lies ahead. While AT&T and Verizon push each other to stay out in front, Sprint may have more upside potential and could sneak up along the rail to someday catch up to those two thoroughbreds.

Additional Disclosure: Catalyst Investments is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. This information is not investment advice or a recommendation or solicitation to buy or sell any securities. Catalyst Investments does not purport to tell or suggest which investment securities readers should buy or sell. Readers should conduct their own research and due diligence and obtain professional advice before making investment decision. Catalyst Investments or anyone associated with Catalyst Investments will not be liable for any loss or damage caused by information obtained in our materials. Readers are solely responsible for their own investment decisions. Investing involves risk, including the loss of principal.

Source: Sprint Nextel: A Surprising Pick