Sprint: New Contract, New Hopes

Apr. 7.11 | About: Sprint Corporation (S)

Sprint Nextel Corp. (NYSE:S), the third-largest U.S. wireless carrier, extended its $1.2 billion three-year health care purchasing contract with VHA Inc. Sprint has been providing wireless and wireline services to VHA for more than 14 years.

The contract win will serve as a major catalyst to the company in the current scenario in which it is eyeing opportunities for growth. Sprint has been worried since the proposed merger of AT&T Inc. (NYSE:T)) and Deutsche Telekom’s unit T-Mobile USA was announced, following which its shares tumbled. The dramatic fall raised management’s concerns regarding faltering market sentiments over its stock.

Spring stated that the approval of the merger might significantly alter the structure of the overall telecommunication industry. AT&T and Verizon Communications Inc. (NYSE:VZ) are already the prime wireless providers and, following the T-Mobile buy, the former would be almost three times the size of Sprint. Additionally, the two dominant companies would control almost 80% of the U.S. wireless post-paid market.

Sprint’s share is eroding continuously in the U.S. wireless market due to its inability to provide competitive services. Thus, the merged AT&T might further hurt Sprint’s profitabilty and eat into its subscriber base.

Hence, in the current situation, any positive news flow will breathe life into Sprint. In February, Sprint extended its supplier contract with Western States Contracting Alliance through October 2012 for $360 million. Further, the company has hired the ex-financial chief of Qwest as its new CFO. Sprint is pinning its hopes on the experience and expertise of its new CFO to return to profitability by gaining market share from its rivals.

Moreover, in the fourth quarter of 2010, Sprint started to turn around its post-paid wireless business after several years of cost containment and business stabilization. The company is expected to benefit from increased penetration of smartphones, rising average revenue per user and lower churn in the post-paid wireless segment.

Although we believe Sprint has a little room to regain its lost market share, we are currently maintaining our long-term Neutral recommendation on Sprint with the Zacks #3 (Hold) Rank.