Still Staying Away From Sprint

Nov. 8.11 | About: Sprint Corporation (S)

Sprint (NYSE:S) announced weeks ago that it will need $7 billion of new financing to build up its infrastructure and network now that it has the iPhone from Apple (NASDAQ:AAPL). For a company already saddled with tons of debt, the question was where was this money coming from and how expensive would it be?

Well, late last week, we got part of the answer. Sprint got $4 billion in notes. Here's the breakdown:

  • $3 billion due 2018 with interest rate of 9%
  • $1 billion due 2021 with interest rate of 11.5%

Sprint got some of the money it needed, but those notes will add another $385 million in pre-tax expenses to its numbers. Since the IPhone deal was four years, let's look at the debt Sprint has due between now and the end of 2015, with the amount in millions.

Date Due Amount Rate
3/15/2012 $2,000 8.375%
3/30/2012 $250 3.548%
5/1/2013 $300 2.379%
10/31/2013 $1,473 6.875%
3/15/2014 $1,170 5.950%
8/1/2015 $2,137 7.375%
12/15/2015 $500 4.248%
Click to enlarge

That's nearly $8 billion due in the next four years, at a weighted average interest cost of 6.8%. Given that the $4 billion just raised was at 9% and 11.5%, Sprint better get a lot of new customers from the iPhone. And don't forget, it's paying Apple over $650 per phone. This is a very risky proposition.

When I said to stay away from Sprint until it raised capital, I meant it. The company still needs another $3 billion, and has over $2 billion coming due in March of 2012. Now that the bar is set for interest rates, the next $5 billion it needs could fetch even higher rates if it goes that far out on the time horizon.

When I wrote the after-earnings article from above on Sprint, analysts were expecting a 92 cent loss in 2012 for the company. 2 months ago; the forecasted loss was only 68 cents. It's now $1.07, and that's gone up 4 cents in the last week alone. The losses will only get bigger as more interest costs will weigh down the stock for now. Most don't expect the iPhone to help Sprint for another year or two. Don't forget that Sprint also could lose another $2 billion from Clearwire (CLWR). Clearwire finished last quarter at $2.33, but is now at $1.95. That will mean more losses for Sprint.

I've been saying that you should stay away from Sprint for now, and I will continue that stance even after the $4 billion raise. It still has a lot of work to do, and a lot of money to raise. If you're looking to benefit from the iPhone, stick with Apple. You could also buy AT&T (NYSE:T) or Verizon (NYSE:VZ) as a safer play on the device, and at least you'll get paid while waiting. You could even buy one of the cell tower companies, American Tower (NYSE:AMT) or Crown Castle (NYSE:CCI) if you think the infrastructure build is just starting. But for now, stay away from Sprint.

In case you didn't understand all of that, here's a nice summary table to wrap things up. For the Now column, I'm just adding the $4 billion of debt to both cash and long term liabilities. I'm not assuming any quarter to date balance sheet effects. As you can see, the trend is not Sprint's friend.

(millions) 12/31/2008 12/31/2009 12/31/2010 9/30/2011 Now
Assets $58,252 $55,424 $51,654 $49,043 $53,043
Liabilities $38,647 $37,329 $37,108 $35,717 $39,717
Equity $19,605 $18,095 $14,546 $13,326 $13,326
L/A 66.34% 67.35% 71.84% 72.83% 74.88%
L/E 197.13% 206.29% 255.11% 268.02% 298.04%
S Price $1.83 $3.66 $4.23 $3.04 $2.91
CLWR Price $4.93 $6.76 $5.15 $2.33 $1.95
Click to enlarge

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