Sprint Is Treading An Unsustainable Path

Mar.22.12 | About: Sprint Corporation (S)

It's not uncommon for investors to avoid or even make dire attempts to put a positive spin on what is often the inevitable. Even research firms are sometimes hesitant to announce basic facts. Such was the case with Bernstein Research's latest downgrade of Sprint Nextel (NYSE:S).

The downgrade should come as no surprise. Sprint's business model has increasingly hinged more on survival than actual competition. With a share price near all-time lows and a balance sheet filled with nothing other than red arrows, the company's current condition is as displeasing as one could find in the market. The fact that it has reported losses for the last 13 quarters and is on tap to report a further 71% drop in earnings in 2012 isn't too appeasing either.

The Bernstein Research report also went into the company's rising debt maturities. Faced with $1.8 billion in debt maturities due by the end of next year and another $2.6 billion due by 2015, nothing short of a takeover may eliminate the likely bankruptcy filing that lies ahead.

For obvious reasons, Bernstein Research didn't predict a Sprint bankruptcy filing. Like most other research firms, it has been hesitant to make such a bold projection and risk damaging its credibility if such a position were to be proved false. However, it did rate the company an "underperform" and lowered its price target to $1.75, or a 37% depreciation from the current levels.

Still, even though Bernstein may have left some hope for Sprint's future, no matter how slight that may be, below are three reasons why bankruptcy for Sprint is all but inevitable:

  1. Competition: When your own business model is failing, nothing is more devastating than to see others in your industry posting solid numbers. With Verizon's (NYSE:VZ) earnings expected to appreciate 15% this year, and AT&T's (NYSE:T) expected to rise 6%, it appears what few customers Sprint has left are already heading elsewhere.
  2. Debt: As if Sprint's own debt wasn't enough, Clearwire (CLWR), which is majority owned by Sprint, faces $3 billion in debt maturities coming due in 2015. With the $2.6 billion already owed by Sprint that year, this mountain of debt could come to destroy any chances Sprint has of recovering, that is if it is still in business in 2015.
  3. Poor Management: It's one thing to struggle with your own business, but to go out and take a majority stake in December in a company such as Clearwire, which has suffered astronomical losses for years, shows how desperate, and unwise Sprint's management team has become. Trying feverishly to save its own business, it has begun making moves that could only bankrupt the company faster.

With shares recently rebounding 23% from January lows, now would be a wise time to get out before Sprint reports first quarter earnings in just over a month; the company's earnings are projected to come in at a loss of $0.42.

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