Sprint Nextel (S) today is merely a shell of what it used to be. The firm was once an industry powerhouse where the sky seemed to be the limit. These days the firm is running around trying to get its act together again. The few Sprint Nextel bulls will strongly back the turnaround idea but what we care about is what it actually means. What is the real goal for Sprint? What is being done to actually convince the everyday investor that this “turnaround plan” is actually occurring and being executed properly? Take a look at the financials and it’s disastrous. The story sounds great but the numbers don’t agree.
Again, some say, just wait till the turnaround happens. But let’s remember, no one lives forever. These days when Sprint Nextel is calling us up we let the calls go to voicemail. At this point we rank Sprint as a PASS for two reasons that deal with the financials and the gap we see in the “turnaround” story.
The Financials Are Missing a Vital Organ or Two
The first time we took a look at Sprint’s financials we just slid back in our chairs thinking about where to start. When we reviewed the top line we saw that whether we looked at quarterly or annual numbers, growth was anemic at best. Basically the firm was surviving off its current base of customers. As we reviewed operating expenses we saw that the firm had managed to make genuine attempts to cut down on COGS (Cost of Goods Sold) and SG&A (Selling, General, & Admin.), which did help reduce losses, but at the current pace just isn’t cutting it. Even with that we still noticed inconsistencies over the last 4 quarters on how well this cost cutting was working to reduce the financial bleeding.
When looking through Sprint’s balance sheet its liquidity position at face value looked decent. Still, one area of concern we found was the substantial amount of net receivables outstanding. It basically looked like clients weren’t paying their bills, so we reviewed the cash conversion cycle to make sense of things but we couldn't. Over the last twelve trailing months the firm has operated literally with a negative cash conversion cycle. The cash conversion cycle on a high level illustrates how quickly a firm can convert its product/service back into cash through sales. On the positive side, once we saw the negative cash conversion cycle it helped explain the firm’s income statement numbers.
We finally took a look at the cash flow statements and as anyone can probably imagine they were all shot up. Both operating and free cash flow were negative for 2010 as a whole. The only bright spot that we saw was the improving operating cash flow number even if it’s still in the red. Less red is always better than more red.
The take away point here is that the firm literally looks like it’s missing some vital organs. We understand that turnarounds take time but again investors can’t wait forever when top and bottom line numbers aren’t materially improving at a certain pace. When we hear “turnaround” we want to see some speed plugged into the strategy because a slow and steady turnaround doesn’t sound compelling to most investors.
Where is the Magic Show?
In the investment community it’s always a forward-looking world; looking to see where a stock is likely headed next. A history of success is great but what matters the most is where the company is going now. Essentially investors want to know, what is the next catalyst, the ace up the sleeve, what we call the “the magic show?” We are interested in the latest developments, new products, and or any other agendas that will keep the company achieving the goals that shareholders demand from management. Looking at Sprint today we question whether there really is much of a catalyst or “magic show” behind the curtains.
The bulls argue that the firm is finally using assets more efficiently. Well that’s great but unless these bulls have been living under a rock there is still a full-blown smartphone war going on. Verizon (VZ) and AT&T (T) are competing with each other like there's no tomorrow. Where is Sprint in all of this? In our opinion it is nowhere to be found and bringing on 2nd tier smart phones just doesn’t cut it.
Sprint was once a titan of industry and now isn’t even on the same playing field as some of its competitors. We feel Sprint just doesn’t have a catalyst that can justifiably send the stock price higher and retain the confidence of investors again. We rank Sprint a PASS because it looks to be "down for the count" but we hope that it can make changes to prove us wrong. There may come a day when Sprint actually looks interesting again but at this point it seems a long way out. For those interested in this space we like AT&T and Verizon.