Shares of Sprint (S) fell another 3.6% on Friday to close at $2.38, the lowest close since October 11th. There hasn't been a lot of negative news lately, and in fact, things could be somewhat positive, since it appears that AT&T (T) is running out of options to salvage their T-Mobile takeover. Shares are down more than 18% over the past two weeks, and although the markets haven't done well, Sprint's stock seems to be in the midst of another nosedive. Now, I've been a notable bear on Sprint, and if you haven't seen any of my articles on the company, take a look at some of my Sprint-focused articles:
- Sprint Reports Mixed Results
- Still Staying Away From Sprint
- Will Sprint's Four Front War End in 2012?
In my latest article, I detailed that one of Sprint's main issues was its relationship with Clearwire (CLWR). Sprint maintains a large ownership through both debt and equity in Clearwire, with the investment being worth over $2 billion at last quarter's end. At that point, Clearwire was trading at $2.33. Just a week ago, the stock took a plunge as the CEO made some comments about the possibility of default and not paying their next interest payment. They now trade for $1.54, although Sprint's entire investment is not in equity. Whether or not the company would default is uncertain. It could simply be a ploy to find additional financing, which it needs, be it from Sprint or somewhere else. Now Sprint and Clearwire both depend on each other, but their business agreement is scheduled to end in 2012. Sprint has not decided on whether to extend that agreement or not. It could very well depend on Clearwire's survival. Now Sprint does depend on Clearwire's spectrum a bit, so a Clearwire bankruptcy could have serious negative impacts for Sprint. I think Sprint will cave in at some point and save Clearwire, but only because it has to.
Now the white knight is coming for Sprint, although slowly. Starting in October, Sprint did start selling Apple's (AAPL) iPhone, and if they can steal customers away from AT&T or Verizon (VZ), it would be wonderful. The incremental revenue Sprint receives from these new customers would be significantly higher than if current subscribers get the iPhone, but if they can get current subscribers to upgrade their plans, they'll still benefit. The problem is that everyone needs to be patient. The Sprint deal with Apple for the iPhone is for 30 million phones over four years, so it will take time for Sprint to sell all of those phones and reap the revenue streams. This is not an overnight process. Sprint is also involved in a significant upgrade of its network and infrastructure to help deal with the added weight from Apple's iPhone. That process will take time and is very costly. Sprint said a little while back that it needed an additional $7 billion in new funding. It was able to acquire $4 billion of that recently, at a weighted average interest cost of 9.625%. That's quite high, and a lot higher than most of Sprint's other outstanding debt, which was about $18.5 billion before this new money came in.
Sprint is not in the greatest financial condition, and thus, the interest rates it will be paying on new debt are going to be high. Don't forget they still need to raise an additional $3 billion. That is going to cost them a pretty penny, depending on when the maturity is. But that's not the worst part. Over the next four years, basically the length of the IPhone deal, Sprint has $8 billion of debt coming due. Sprint needs a homerun from the iPhone, or it's game over. Can you imagine refinancing all of that debt if Sprint's condition worsens from here? Well, we'll find out soon enough. $2.25 billion of that debt comes due in March of 2012. That debt currently has a weighted average interest cost of 7.84%. One can assume it will be going up. Those extra interest costs and network upgrade expenses have caused analysts to slash earnings estimates for the company in 2012. Over the past 90 days, the forecasted loss for Sprint next year has gone from 68 cents to $1.12. Estimates for the current quarter have been revised down by 10 cents a share over that time period, and next quarter's numbers have come down by 12 cents as well.
Now to be fair, Sprint has beaten analysts' expectations in three of the past four quarters, so this could be analysts (like myself) being overly negative. Sprint could easily blow past expectations again. But will that help the stock? Sprint has lost $8.7 billion over the past three years, and current estimates call for another $5.9 billion in losses between 2011 and 2012. While revenues are increasing, and the deal to get the iPhone from Apple are encouraging, the market has not been kind to Sprint in 2011. Shares are down nearly 44% on the year, and down 63% from the high point of the year set at $6.45. There's still a lot of room left for the shares to fall, however, which is why I've recommended staying away until at least $1.75. It could be a year or two before the company reaps the benefits of the iPhone, so why should you continue to lose money on the name?
If you truly want to make money off the iPhone, the best place to always be is Apple. Other than that, Qualcomm (QCOM) is another great choice. They make some of the chips for the phone and Apple has always seemed to enjoy their partnership. Qualcomm is forecasted to have both double digit revenue and EPS growth over its next two fiscal years. Both Apple and Qualcomm have come down nicely during this most recent market selloff, and both appear to be attractively valued. Of course, you could also get some value out of AT&T and Verizon, which right now are yielding 6.28% and 5.66%, respectively. But when it comes to Sprint, 2012 cannot come soon enough.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.