Sprint: A Bet On Clearwire And Lightsquared As Much As The Actual Company

| About: Sprint Corporation (S)
Sprint (NYSE:S) shareholders have been on an absolute rollercoaster this year. For a brief period of time, a strong first quarter propelled shares to over $6, but the broader market sell-off and a lack of profitability brought shares down to the $3 range where they hover now. We think the company is fairly valued at these levels.
There was a small pop when the rumor broke that it would begin carrying Apple’s (NASDAQ:AAPL) iPhone 5 in mid-October, but shares came tumbling back down. Ultimately, Sprint is the smallest of the three major national carriers, both by number of customers and actual service coverage. With the ATT (NYSE:T) – T-Mobile deal still in limbo, Sprint could end up being the only low-cost provider of nationwide service. Or, it won’t be.
Either way, we think the real future of Sprint doesn’t lie in its brand itself. Technically speaking, the exclusive HTC Evo line is one of the best on the market, though it pales in comparison with the iPhone. And with the iPhone likely coming to Sprint, we think Sprint is poised to steal market share. It appears the Sprint iPhone will be the only one with an unlimited data plan, which will steal customers tired of paying for data by quantity consumed.
The company also added over 1 million subscribers in the second quarter without the iPhone. Though the subsidy and acquisition costs will be high, we are confident it will end up being accretive to revenue and long-term profitability. Furthermore, Sprint was named number one in customer service for all mobile carriers in 2010; things are moving in the right direction…operationally.
Clearwire: An unmitigated disaster
Unfortunately, the operations are just one part of the equation. On the other hand, the balance sheet is a mess. Sprint has a tremendous amount of debt, though none coming due until 2012. However, since it has been cash flow positive for the last six quarters, we aren’t really worried about debt at this time.
We are extremely worried, however, about Clearwire (CLWR). Clearwire is a publically traded company, but Sprint is the owner of 54% of its shares. While Clearwire attempts to build up its own—and also Sprint’s—4G network, it has struggled to take much of the mobile Internet market share and is burning through cash (already over $1.7 billion year to date). The success of this 4G network will determine the fate of Clearwire, and possibly even Sprint’s share price.
Unfortunately, the company doesn’t seem too convinced that Clearwire will work out. In late July, it inked a deal with start-up Lightsquared for over $13 billion for access to its satellite 4G and LTE network. Lightsquared has received the majority of its publicity due to hedge fund manager Phil Falcone’s enormous investment, but it is unclear whether or not the company is viable and that its technology doesn’t interfere with other satellites.

So it comes down to this: Sprint is facing stiff competition from much larger competitors who offer more phones and have better profit margins. The future of its next generation technology depends largely on two start-ups with poor results. As much as we like what CEO Dan Hesse and his management has done operationally, especially in the pre-paid business, we think Clearwire and Lightsquared could prove to be just as bad investments as Nextel was a few years ago. With a fair value range of $3 to $5, we think Sprint is fairly valued and represents a risky investment we’d prefer to stay out of. As a result, it remains absent from our Best Ideas list.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.