The purpose of this article is to determine the attractiveness of Sprint Nextel Corporation (S) as an investment option. To do so, I will review Sprint's recent performance, latest annual and quarterly filings, and current trends in the industry to attempt to determine where the stock may be headed from here.
First, a little about Sprint. Sprint is a holding company that operates in two segments: Wireless and Wireline. The company offers a range of wireless and wireline communications products and services to subscribers in all 50 states, Puerto Rico, and the U.S. Virgin Islands under the Sprint corporate brand, which includes its retail brands of Sprint, Nextel, Boost Mobile, Virgin Mobile, and Assurance Wireless. The company competes with heavyweights such as Verizon (VZ), T-Mobile(TMUS), and AT&T (T), among others. Recently, in May 2013, Sprint Nextel acquired Handmark Inc.
Over the short-term, Sprint has performed strongly. It is currently trading at $7.35/share and year to date the stock is up almost 30%. Over the past 52 weeks the stock has climbed an impressive 168%. Sprint currently does not pay a dividend and the stock has a beta of .96, which indicates it is slightly less volatile than the market as a whole. On a longer time horizon, the company has not fared as impressively. The company ceased paying dividends after 2007, and has not reinstated a dividend payment since. Over the past 5 years the stock is down over 18%, and over the past 10 years the stock is down almost 48%, excluding any dividend payments. Therefore, with such a mixed history, I wanted to examine recent performance to see what the future may hold for S.
When comparing the company's most recent 10-Q and 10-K reports, I again found mixed signals. Year over year results from 2011-12 were largely unimpressive. While net operating revenues grew at just under 5%, the company's net loss was close to 50%. These losses were partly due to Sprint using cash to finance expansions, such as the purchasing equity for Eagle River Holdings, LLC, for $100 million in cash and a merger agreement with Clearwire Corporation, both in late 2012. S also incurred a depreciation expense of over 50% from the year prior, but the area that concerned me the most was that both the wireless and wireline segments were down in year over year comparisons. This could be due to a variety of factors, such as slowing (or declining) subscriber growth, increased price competition hurting its margins, and/or increased costs. As such, I reviewed the most recent earnings statement and 10-Q from Sprint, which compares 1st quarter performance of 2013 to the first quarter performance of 2012, including data up to 3/31/13, to see if Sprint reversed any of these trends.
After doing so, I did notice a few encouraging trends. One, net operating revenues continued to increase. While it was only an increase of just over .6%, it still shows progress. Additionally, Sprint narrowed its net loss from the previous year, down to $643 million from $863 million, a decline of over 25%. While this is impressive progress, it still shows the company is earning a negative return, not something any investor would want to see. In a similar manner, Sprint has been incurring equity losses from its investment in Clearwire, but these losses are also being trimmed, down to $202 million from $290 million, a decline of roughly 30%. So again, while Sprint may be losing money, it is trimming its losses and improving margins, so investors who feel that a meaningful turnaround is ahead for the company could find its current valuation as an attractive entry point.
While Sprint has shown some massive improvements over the last year, and investors have been handsomely rewarded because of it, I still cannot commit to buying Sprint at these levels because too many risks remain. While competitors like T and VZ do trade at high multiples, those companies at least have positive earnings. It is hard to make a straight comparison to Sprint because the company is suffering, albeit slowing, losses year over year. Additionally, Sprint operates in a heavily regulated and heavily competitive market, limiting its pricing power and growth prospects. In this type of environment, I prefer market leaders (such as VZ and T) over the smaller players. Coupled with the fact that S does not pay a dividend while T and VZ have yields of over 4%, I find an investment in Sprint hard to justify.
A final reason I do not like Sprint is that the company has an incredible amount of debt, over $24 billion as of the most recent quarter. As such, Sprint is highly susceptible to both a decline in general economic conditions and rising interest rates. Either of these events would hurt Sprint disproportionately to its competitors because Sprint is highly leveraged and requires significant amounts of its cash flow to be used towards servicing this debt. This is compounded by the fact that Sprint's debt is below investment grade, which results in higher borrowing costs than investment grade debt, which its top competitors have, as well as reduced marketability of its debt. In the long run, this could hurt Sprint's ability to respond swiftly to changing consumer preferences because cash that could be used for new investments and products is being tied up towards making interest payments.
Bottom line: Sprint has had a remarkable run recently and the company shows promising signs of turning around. While some recent acquisitions have yet to be profitable, long term these investments could turn out to be beneficial for Sprint and the company's stock could reap the rewards. However, Sprint is currently operating in a market that has very high rates of penetration, thereby limiting its growth prospects and forcing it to compete head-on with world-class companies like Verizon and AT&T. With higher levels of debt, a non-existent dividend, and negative earnings, investors should be cautioned away from Sprint at this time.