The last time I wrote about Sprint Nextel (S), I briefly discussed the historic share price performance. More recently, I wrote about AT&T and Verizon. In those reports I recommended investors to reduce long-equity exposure to the share price of both AT&T (T) and Verizon (VZ). In this report we'll go into more detail about Sprint.
The goal of this research report is to help investors improve risk-adjusted returns. Also, investors should have a better understanding of the industry at the end of this report.
The aforementioned firms tend to be purchased for the divided yields. Thus, we'll analyze them from the perspective of a credit analyst. Additionally, we'll discuss the sources and uses of cash flows. Then, we'll value the equity securities. Finally, we'll utilize the technical tools and reach an investment recommendation.
The valuations are a bit stretched; thus, investors should begin to take profit, which was made being long common-equity shares of Sprint. Next, we'll do some credit analysis.
In this section, we'll do the credit analysis of Sprint, AT&T, Verizon, and Vodafone. The firms compete in the wireless cellular phone industry. However, AT&T and Verizon also compete in other industries. That said, I believe the comparisons are relevant as the capital structures of the firms are similar.
Sprint has a solvency issue. Between the end of 2011 and the end of 2012, the liquidity position improved. However, the solvency position deteriorated significantly. The adjusted long-term debt-to-equity ratio increased from 1.83 to 3.56. The financial leverage ratio increased from 4.32 to 7.28; the financial leverage ratio resembles a bank's financial leverage ratio.
AT&T's solvency position also deteriorated. The adjusted long-term debt-to-equity ratio increased from 1.75 to 2.89. The financial leverage ratio increased from 2.56 to 2.94. AT&T is more solvent than Sprint. However, the cash ratio stood at 0.15: AT&T is less liquid.
On the other hand, Verizon became more solvent. There is an issue with the credit analysis of Verizon: the consolidated non-controlling interest may be masking the true debt burden. That said, the adjusted long-term debt-to-equity ratio declined from 0.80 to 0.78. The financial leverage ratio declined from 2.68 to 2.63. The long-term debt-to-equity ratio is out of line with Verizon's peers.
Vodafone reports using IFRS; thus, we are using data from March 31, 2011 and 2012. The firm had the best solvency position. However, that position deteriorated during the period. The adjusted long-term debt-to-equity ratio increased from 0.67 to 0.71; the financial leverage ratio increased from 1.73 to 1.81.
As you can see Sprint is in horrible financial condition relative to the peer group. The firm's financial leverage ratio resembles a bank's financial leverage ratio. Next, we'll cover the statement of cash flows.
In this section, we'll examine the cash flow statements of the four firms. We will analyze the sources and uses of cash flows.
Sprint reports high-quality earnings. However, while the firm generates cash flow from operations, cash flow from operations declined every year since at least 2011. Also, Sprint isn't generating enough cash flow from operations to cover capital expenditure. Thus, Sprint is increasing financial leverage.
AT&T reports high-quality earnings, and cash flow from operations is increasing. Cash flow from operations covers capital expenditure and cash used in investing. Additionally, AT&T is returning the excess cash to shareholders, but borrowing from creditors.
Verizon also reported high-quality earnings, but cash flow from operations was below the 2010 level. Cash flow from operations was enough to cover capital expenditure. That said, the cash balance declined ten billion dollars in 2012 on a special distribution.
Vodafone reports cash flow in a different format. Operating cash flow covered investing cash flow and the cash balance increased while the enterprise deleveraged.
Thus far we have established that Sprint has solvency issues and a cash flow problem. Sprint's network features lag the competition, and the firm isn't generating the cash flow to catch up. Next, we'll develop forward multiplier model valuations.
To value these securities, I will forecast future financial performance and develop forward multiplier model valuations. We will also use time-series relative valuations.
I'm forecasting 2013 Sprint revenue in the $36 billion to $38 billion range. My current price-sales valuation is 0.54, using a share price of $6.21. The forward valuation is between 0.52 and 0.49.
Using a current share price of $36.69, AT&T is valued at 1.63 times trailing sales. The forward valuation is roughly 1.59 times sales.
The current share price of Verizon is $49.01; the price-sales ratio is 1.21. The forward price-sales ratio is between 1.17 and 1.23.
The current share price of Vodafone is $28.40; the forward price-sales ratio is between 2.90 and 3.03.
Relative to its peers, Sprint would seem undervalued. However, the credit risk is weighing on the equity valuation. On a relative basis, Sprint's price-sales ratio is probably close to a peak as the firm trades at levels consistent with prior peaks in the price-sales valuation.
Based on the valuation and the credit risk, investors should reduce long-equity exposure to common equity shares of Sprint Nextel.
Professionals use technical analysis to manage practical risk. We will use trend indicators, momentum studies, and Dow theory to help us reach a conclusion based strictly on the technicals.
Based on technical strength, Verizon is leading followed by AT&T, Vodafone and Sprint, respectively. All four firms' share prices are in intermediate-term up-trends with momentum confirmation. Longer term, we are seeing some momentum divergences. Throwbacks may be limited in depth as we remain in a Dow theory defined bull market.
Based on the technicals, investors should lighten up on their Sprint long-equity position.
So, investors should reduce their long-equity exposure to common equity shares of Sprint as the firm has solvency issues, a cash flow problem, and an extended valuation.
Further research should add depth to the analysis by including more industry statistics including data on subscribers.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.