Sprint Getting Cheaper

| About: Sprint Corporation (S)

We added Sprint (NYSE:S) to our watch list, The Kelly Letter, earlier this month. We use the list to keep an eye on promising stocks so we can buy them more cheaply later. Sprint shares are down 9 percent since we began watching them, so patience has paid. Many people have argued that the drop in share price shows we’re barking up the wrong tree on this idea, but most of the best buys we’ve made began the same way. We love falling prices prior to buying because the companies we watch are of good quality and will recover.

Sprint is no exception. Almost everybody sees its recent negatives without noticing the progress it’s made in reinventing itself. From a peak market share of 25 percent, it fell to just 13 percent in 2009. Since then, though, it’s climbed up to 18 percent. It’s the third largest carrier in the United States, and it’s demonstrating positive signs in its customer service ratings, the broadening of its handset catalog, and its speedy network.

On the latter, CNET found at CES that on “the 4G side, Sprint beat T-Mobile by offering both the fastest data speeds and the most reliable network.” According to Auriga Securities analyst Chandan Sarkar, Sprint’s spectrum holdings alone are worth some $9B. Add on a base of 50 million subscribers that’s shown signs of growing, and the potential for a decent turnaround to share price targets of between $6 and $8 looks reasonable.

You’d never know it by looking at Sprint’s current figures, though. Earnings per share, for example, have declined from 87 cents five years ago to a current -$1.19. Bad, yes, but that’s why the stock is 80 percent cheaper today than it was five years ago, down from $21 to $4.27. Meanwhile, now that all the bad news is out, Sprint’s operating margin has dramatically improved from -72 percent three years ago to -3 percent now. It’s still not pretty, but it’s moving in the right direction. It’s better to buy when results are heading in the right direction than once they’ve already arrived at a good destination.

Sprint announced Tuesday a $10-per-month price hike on its monthly fee for smart phone users. Beginning Jan. 30, smart phone customers who activate new handsets will pay an extra $10 per month because, on average, they consume 10 times more data than customers with simpler handsets. The change will help Sprint’s margins, and the new $80 monthly rate for Sprint’s almost unlimited data plan still comes in cheaper than its rivals.

With much of the downside risk looking priced into the stock, Sprint could well deliver 50-percent gains or better for those who buy it at the low end of its one-year range between $3.50 and $5. It’s currently in the middle of that range, but nosing lower into territory that I think will warrant buying soon.

While we’re just watching now, we’ll eventually place a hard order to pick up shares of this turnaround story on the cheap.

Disclosure: No position