Is Sprint Out of the Doghouse?

 |  Includes: DTEGY, S, T, VZ
by: Violent Capitalist

Conservative Fair Value: $8/share
Strategy: Sell May puts strike $4 for $.20 for a 5% yield or an effective buy in of $3.75

Ahh Sprint (NYSE:S), was there ever a more vilified telecom company that survived the telecom bust? After years of dodgy customer service, dodgy cellular service, dodgy acquisitions, and a dodgy capital spending culture - the ugly duckling of the US wireless industry is showing signs of stability and maximizes its value today to possibly present itself gift-wrapped to a larger player.

I won't get into specifics about how/why Sprint has cleaned up its house, you can read plenty of articles on that. I'm just going to dive into some numbers on why I believe this company can be worth up to $8/share. The company is still not in the best position given that its subscriber base is still showing signs of attrition. Competition is rampant. On one side you have all the newest phones and gadgets with the largest competitors (AT&T (NYSE:T), Verizon (NYSE:VZ)) and on the other side you have low cost unlimited plans on older networks. Sprint really tries to compete on all sides... basically this is not at all an investment thesis for the faint of heart.

So Sprint is in an ominous position, and losses have been piling up for over 3 years now - and are likely to continue to do so. In 4Q of 2009, Sprint's loss was about $1billion. I figure it's safe to say that for 2010 they will have accumulated losses of about $3-4billion (most analysts generally are projecting continued improvement in net income). Depreciation in 4Q was about $1.8 billion, annualized that totals $7.2billion. Operating cash flows can total is $3.2-$4.2billion. In 2009, capex totaled approx $1.6billion. 2009's capex is understated in terms of sustaining operations, but regardless of FCF by my estimations (assuming capex of $2.2bil in 2010) is $1-$2billion.

Market Capitalization for Sprint is currently approx $12billion. Cash totals $3.8billion and debt totals about $21billion. Enterprise Values is therefore about $29billion. At the low end of the range, Sprint trades at a valuation of 30x FCF, at the higher end of the range it is at 15x. This company is still in distressed mode and is trading quite high.

Now the kicker with Sprint is the fact that they have 48million subscribers. At $29billion enterprise value, that values each subscriber at about $600.

AT&T has an EV of about $220billion and 85million customers for a valuation of $2600 per subscriber. AT&T has some wireline business so we can give wireless 65% of the valuation or $143billion for a value per subscriber of $1700.

Verizon has an EV of about $190 billion and 87million customers for a valuation of $2200 per subscriber. They also have some fixed line stuff, but its earnings is nominal at the moment, at best maybe worth $10billion, which would make each wireless subscriber worth about $2000.

Deutsche Telekom's (DT) TMobile has an EV of $113 billion with 40% of revs from US wireless equals $45.2billion. With 34million subscribers, it is worth about $1300 per subscriber.

Basically, even if Sprint should lose half of its subscriber base in the next 2-3 years and total $1200 per subscriber, someone should be eyeing the company as a juicy acquisition at its current price plus a premium for synergies (which can easily total $1-2billion on the capex side for a national wireless co).

Furthermore, Sprint has really taken the initiative on investing in spectrum and in other wireless technologies. Verizon and AT&T have about 30% of market share vs. Sprint and TMobile's 13-17%. Sprint has also embraced the prepaid service by acquiring Virgin Mobile most recently. Guess what? TMobile has a prepaid, pay as you go service as well. TMobile is likely that someone, since the others will throw warning signs of a monopoly to the FTC.

A German marriage leading to an American pure-bred? TMobile has suffered a bit in the US as well. I wouldn't be surprised if Deutsche Telekom took the initiative in making a stock offer for Sprint, and spinning out the US operations to shareholders at a cost of about $8/share.

Because I like its stock at a $29billion EV, you may want to look into some 10% yielding Sprint bonds as well. Personally I'd pick the shorter duration ones and try to pick up the senior secureds if possible.

Disclosure: I am long Sprint stock