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The past few years have brutal for Leap Wireless LEAP. Since 2007, this small-cap telecommunications firm has struggled to make a profit, added a billion dollars of debt, and saw its margins steadily fall. During this same time, LEAP's share price collapsed by over 90 percent. Considering this ugly run, it's easy to see why investors are jumping ship to more stable looking competitors like Verizon Communications VZ and AT&T Inc. (NYSE: T.

While LEAP definitely has problems, the situation may not be as dire investors seem to think. When you dig deeper, there's a reasonable chance that this company has been oversold. Several large hedge funds seem to think so, as they significantly increased their holdings in LEAP earlier this year. What are they seeing that other investors are not?

First off, LEAP seems to be addressing its problems. One of LEAP's biggest issues is that it can't hold on to customers. Each year, it loses nearly as many old customers as it takes on new customers, a trend known as churning. Since 2009, LEAP has not been able to significantly grow its subscriber base. This stall likely came from a couple reasons. First of all, LEAP does best when it targets the less expensive, prepaid phone market. However, over the past few years, LEAP tried to expand into more expensive phones and plans. This move didn't pay off, and management now plans on refocusing on the prepaid market. In addition, LEAP was notorious for having poor customer service. This is another issue that LEAP plans to focus on. These two moves should help reduce churning.

Beyond stabilizing its business model, LEAP could also pay off as an investment if it is bought out by another company. Earlier this year, a market analyst gave a 70 percent chance that Telus TU would purchase LEAP. This merger eventually fizzled out, but it shows that the major companies could be interested later on.

LEAP's main value right now comes from its spectrum holdings. This is the company's capacity to handle wireless data. LEAP is operating well below its full capacity, so it has plenty of room to expand. Competitors are close to maxing out because new wireless technologies are draining spectrum, so LEAP's excess capacity looks appealing. Based on the value of LEAP's spectrum holdings alone, the company is undervalued. The present value of LEAP's spectrum holdings is about $1.5 billion, but LEAP only has a market cap around $450 million. This is why LEAP looks good both for regular investors and for companies planning a buyout. It also makes LEAP's large amount of debt look more manageable.

LEAP's financial situation is far from pretty. It needs to find a way to hold onto existing customers if it's going to eventually turn a profit. However, this ugly balance sheet has spooked investors far more than it should, as LEAP is priced well below its fair market value. If you can look past LEAP's current problems, this stock could turn out to be a great value investment over the next few years.

Source: Leap Wireless Is Hiding Value In An Ugly Balance Sheet