Can Sprint Survive?

Apr.19.12 | About: Sprint Corporation (S)

Last time I wrote about Sprint (NYSE:S), in February, I suggested the company is circling the drain.

The circling has gotten faster.

The iPhone was supposed to save Sprint, but in fact it caused the company's losses to balloon. In order to offer the iPhone to its customers, Sprint had to buy the phones in bulk. Will it sell what it bought before a new model makes them obsolete?

Then, today, Sprint was accused of stiffing the New York State tax man to the tune of $100 million, which could be trebled to $300 million.

The state argues that Sprint interpreted its tax laws as applying only to calls that start and end within the state, not to other calls. It said other carriers paid taxes on all calls but that for 6 years Sprint used its own interpretation.

Blaming the unions for the tax case, as some commenters are doing, does not answer. Fact is this is not the kind of thing a robustly profitable company does. It's the kind of thing someone circling toward bankruptcy does to stay afloat a while longer.

And Sprint has not been a profitable enterprise for some time. Sprint has had negative net income every year since at least 2006, usually amounting to about 8% of revenue. It barely came in last year with an operating profit of $75 million.

Looking at the balance sheet it still reports $5.5 billion in cash and equivalents, but its total assets have been under constant attack, its long-term debt is four times the cash balance, and the debt-to-assets ratio has been marching steadily toward 50%.

Back in June of 2007 the stock was trading at $22/share. That was also the year its dividend ended. It's now under $2.50. Even at it's present price the whole company is listed as being worth $7.25 billion - how?

Is someone interested in buying Sprint? The last big carrier take-out, AT&T's attempted acquisition of T-Mobile, ended in tears before the regulators. They're now looking closely at Verizon's efforts to buy spectrum from a consortium of cable operators.

If this is such a good business why isn't anyone outside the industry interested in making a bid? If spectrum is so valuable, in such short supply, why does this company's value keep going down?

The last big bankruptcy in the carrier space was that of MCI. No one is accusing Sprint of criminal wrongdoing, and I'm not even accusing it of bad business practice. I think it's as well run as you can be when your business model is doomed, as Moore's Law makes your expensive equipment rot away in value, in the field, faster than you can collect the cash from subscribers needed to pay the capital cost.

I'm just wondering at this point what the assets will be worth in a bankruptcy, and what price that spectrum will fetch. My guess is, not much.

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