Sprint Nextel (S) has traded higher by nearly 13% over the last 5 trading days, and has now broken its first level of resistance. Since December 9, Sprint's been unable to cross $2.40, and has traded in a tight range between $2.13 and $2.36. However, on Monday the stock reached $2.45 before pulling back to trade at $2.40 for the majority of the day; it's now trading at $2.45 just minutes before the close. The reasons are speculative but as the stock approaches earnings on Wednesday it appears that optimism is beginning to build, with expectations being so low.
At $2.40 Sprint is the only communication services stock trading at more than 40% below its book-value-per-share. The stock was trading with slight momentum in mid-January but then retraced once AT&T (T) and Verizon (VZ) missed bottom line expectations and RadioShack (RSH) attributed its loss to a decline in Sprint's business. But as earnings approach the picture is starting to clear, and investors are seeing the reality, or likelihood, of Sprint exceeding very low expectations and trading higher. As a result, let's take a look at what's driving this stock higher and what investors can expect moving forward.
Investors are getting very excited about the company's upcoming earnings report. Sprint's earnings are unique, because there are so many variables involved. We already know the company will post a significant loss, but the truth is, investors don't care. Analysts expect the company to lose $0.37 in Q4, which is a loss of nearly 400% greater than in Q3. The expectations are very enticing for investors, because even with the iPhone, the company will still receive higher revenue on monthly rates, cancellations, new customers, etc. And in this particular quarter, revenue and future earnings, are much more important that its net loss.
The total number of iPhones sold is one of the most important pieces of data within the company's earnings report, because it affects so many areas of growth. Obviously, we won't know for sure until Wednesday, but it's still fun to speculate. Let's assume that 40% of all iPhones were sold in the U.S., I believe it could be higher but just to be safe we'll say 40%. If Apple sold 40% of its iPhones in the U.S. then it would equal 14.8 million iPhones total. We already know that Verizon and AT&T combine for 11.8 million phones which leaves 3 million phones for the only other carrier, Sprint.
The expectations for average iPhones sold by Sprint varies by a great deal. Some conservatives have estimated around 1.1 million while others are near 2 million, but I'm yet to see anything that suggests 3 million phones during its Q4. I believe it's very possible that Sprint sold 3 million iPhones in Q4, which would be high above expectations and would mean much higher revenue and earnings in later quarters along with additional net subscribers for the company. These assumptions, or whispers, are part of the story that's driving shares of undervalued Sprint higher prior to earnings.
Net Subscribers/Customer Growth
The most important data that Sprint will announce will be regarding its net subscribers. This data will reflect both revenue and iPhone sales and is important to ensure growth, sustainability, and the possibility for profitability in later quarters. Much like the iPhone, the number of expected net subscribers vary depending on the analyst. This number is very difficult to predict because you have to know how many total phones were activated and the number of iPhones, and its cost. The numbers based on 2 million iPhones sold are typically showing between 277,000 - 300,000 net subscribers added. Therefore, with my simple math, I believe the number will be much higher and that the company could very well announce net subscribers of more that 300,000 and possibly closer to 400,000.
The growth of subscribers has been challenged with RadioShack's low guidance and its blame on Sprint's post paid revenue drop. In a recent article I responded to RadioShack's guidance by saying "when is the last time you bought a phone at RadioShack?" I think my answer sums it up. The largest retailers of smartphones are the actual service provider such as Sprint, AT&T, Verizon, etc. and Best Buy (BBY). RadioShack is a very small percentage of smart phones sold, and I don't believe that it should be used as a guide of what to expect in Sprint following its earnings.
Here lately there's been talk of Sprint being acquired by another company looking to add a service provider. Sprint has the network, products, and infrastructure to make a great acquisitions candidate, and could be acquired at a very reasonable price. In the past I have mentioned that I expect a broadcast company to purchase Sprint, like Dish Networks (DISH). Dish's CEO Joseph Clayton is very aggressive and is making moves to separate the company from competitors. I think the move makes sense especially considering that Clayton has already expressed interest in purchasing a communication services company, and I can't think of another company that would be better than Sprint.
Dish is the most logical company to acquire Sprint, however a fellow Sprint investor mentioned the possibility of Apple acquiring Sprint. The company does have $30 billion in cash and $26 billion of free-cash-flow over the last 12 months, and rising. It could definitely afford Sprint and it could give Apple even more options of how to control its products. In the end its nothing but speculation, but it's been widely discussed among investors, and could be having some affect on the most recent rally in shares of Sprint.
The bottom line is that Sprint is rising but is still very cheap considering its potential with the iPhone. Sprint investors couldn't be in a better situation; the stock is cheap, expectations are low, and the future has never been brighter. Despite the company's low expectations the stock is priced for a missed quarter, and I find this fact to be very encouraging. If just 35% of all iPhones were sold in the U.S. then Sprint should easily beat revenue, net subscription, and new phone activations guidance. And if so, I don't think investors will be too preoccupied with its bottom line results, but with all things considered, the company did cut costs in Q3 and beat bottom line expectations. Therefore, if it continued to operate efficiently then I think Q4 could be the beginning of very large gains, and a continued rally, in shares of Sprint.