Bottom-Fishers, Beware: Sprint/Nextel Could Remain a Value Trap

As an addendum to my recent post on poor cell network voice quality and the iPhone's potential influence on infrastructure improvements, I would remain cautious on shares of Sprint/Nextel (S).

Several hedge and mutual funds have acquired large positions in S, anticipating a WiMAX and hybrid cell/walkie-talkie phone-led recovery (functioning on both its CDMA and iDen networks) and a possible private equity bid for the firm. They may also view its shares as cheap based on perceived book value and the difficulty in replacing the company's infrastructure, retail network, and cellular licenses.

However, I believe that high debt levels ($21B), deteriorating cash flow, and increased competition and customer attrition will prevent a quick snapback for its stock. The company recently lost the opportunity to participate in the first portion of a large-scale U.S. Government telecom contract, jeopardizing the chance to gain a slice of $20-40B in future revenue, and still needs to aggressively bid for the second contract.

Execs continue to sell stock, even at current levels, and tangible book value per share, excluding $30B in goodwill from previous acquisitions, remains in the single digits (dependent on your valuation of the firm's FCC licenses). Moreover, S will need to maintain high levels of capital spending to remain competitive and prevent any short-term recovery in cash flow.

Readers can also review last week's WSJ article for further coverage. The firm could remain a value trap for bottom-fishers and, as I concluded with Motorola (MOT) in January, dead money at least into the end of 2007.

Disclosure: Author is long AAPL.

S 1-yr chart