By Robert Gordon
I have written about a number of large, and not so large, cell phone providers. These have included industry giants Verizon Communications, Inc. (VZ) and AT&T, Inc. (T). I have not discussed yet my most and least favorite cell phone providers. Today I will take a longer look at Sprint Nextel Corporation (S). Of the major western cell phone providers, I believe it is the weakest, and I will analyze what went wrong, and why things are not very likely to improve -- at least not anytime soon.
Sprint Nextel Corporation formed in 2005 when the former Sprint merged with Nextel. The combined company then spun off its landline business to shareholders in 2006, and since then has exclusively been a cell phone provider. That spin off authorized all Sprint shareholders to receive one share in the new landline company, titled, “Embarq” for every 20 shares of Sprint they owned. Embarq was then sold to Centurylink, Inc (CTL) for $11.6 billion in 2009. As it is, Sprint is the nation's third largest wireless company, after Verizon Wireless and AT&T.
More recently, Sprint was trading very near its all time low at about $2.25 per share. Its 52 week range is from $6.45 to $2.10. It has a market capitalization of $6.74 billion. It has no P/E and makes no dividend payment.
Sprint's recent history is best summed in one statement. The recently completed third quarter of 2011, when Sprint lost over $300 million, was the company's best quarter since 2007. Amazing, yet true. And in the press, there was a sense of celebration that it “only” lost that $301 million.
A closer look inside the gross statistics reveals a company as weak as the profit numbers suggest. One key indicator of cell phone company competence is its “churn rate”, the rate of customers that change service providers. Sprint in the 3rd quarter of 2011 had a churn rate of 1.91% on contract plans, and 4.07% on prepaid plans. During the same time, Verizon Wireless's churn rate was on contract plans was 0.94%, and AT&T Wireless had a postpaid churn rate in the same period of 1.15.
While prepaid business is a small fraction of AT&T Wireless and Verizon Wireless, Sprint is the owner of Nextel Boost, Assurance Wireless, and Virgin Mobile. These customers tend to have higher churn, and involve lower monthly revenues than do traditional postpaid customers.
Sprint has a long term relationship with Clearwire, Inc. (CLWR). In 2008, Sprint sold much of its radio spectrum to CLT, in return for an equity stake, under which Sprint owns a majority position in CLT, but has no management control of it. In early October, 2011, Sprint stated it was only guaranteeing its use of CLT's system through 2012, and in the meantime Sprint would build its own Long Term Evolution (LTE) network, at a cost of up to $10 billion. Both companies' stocks took a hit. Then, in early December, there was a sudden reverse. Now, Sprint has given CLT needed capital, and in return has been granted unlimited access to CLT's spectrum through 2013. The downside is that CLT's network is based upon WIMAX technology, not LTE technology. Juggling these technologies will be a huge additional hurdle for Sprint.
The second problem is that no matter what happens between CLT and Sprint, it seems that Sprint will not be able to deploy a national, fourth generation, LTE network. It only has about ten megahertz of capacity, versus the roughly twenty megahertz both Verizon and AT&T own. An alliance between Sprint and CLT beyond 2013 is probable, and needed, to ensure adequate spectrum to have a national LTE network.
Sprint does not have unlimited capital resources. It has lost roughly $9 billion dollars the past three years, and that does not even include taking a nearly $30 billion write down on Nextel's goodwill after the 2005 merger. Sprint carries over $16 billion in long term debt. Its credit ratings are in the junk range by both Standard & Poor's and Moody's. It is now committed to CLT for $2 billion or more. Something has to give, and that “something” is likely to be what is left of shareholder value.
Much is being made of Sprint being able to sell iPhones made by Apple, Inc (AAPL). However, each iPhone costs Sprint roughly $600 to acquire, and it is subsidized to a $200 selling price. In the 12 month period after an iPhone purchase, Sprint is still roughly $200 worse off because of that customer, and only in the second year of the relationship does Sprint begin to benefit. Some might say, that this is not the time for Sprint to be patient.
I am not a fan of Sprint, but some institutional investors are. David Einhorn owns some 74 million shares, and the Dodge and Cox fund family owns over 227 million. The mean analysts rate the stock a modestly negative 2.7.
Given Sprint’s precarious position, debt-ridden balance sheet, and weak customer demographics, I cannot see anyone other than a true speculator taking a plunge. If you are more than just a speculator, I would avoid this in favor of almost any other cellular phone company.