Sprint: Profit From The Short-Term Rallies

May.15.12 | About: Sprint Corporation (S)

Sprint (NYSE:S) is an attractive and potentially lucrative short-term investment. Selling on rallies would be very beneficial for investors interested and willing to buy shares at its current low stock price of less than $3. Sprint's stock price has ranged from over $2 to under $7 for the last 52 weeks for good reason. This can be a highly volatile stock with a beta right now of approximately one.

Sprint is the third largest telecommunications provider in the United States but a high volume of debt, loss of earnings and questionable decisions by management have kept the stock price relatively low in comparison to its main competitors Verizon (NYSE:VZ) and AT&T (NYSE:T). Investors will see significant gains by selling on rallies, but in the long-term, this stock price can always come back down or perhaps even end up lower than it currently is now.

The main issues that keep Sprint from being a confident long-term investment are questionable management tactics which have led to an increasing amount of debt and litigation. The prominence of its chief competitors also brings doubt into play as to whether Sprint can overcome its problems or sustain itself in this industry. There is potential upside when I look at the different things Sprint is doing to increase its value in the industry. Despite this extremely low stock price for a major brand in the United States, the stock price can certainly increase by multiples of five or ten within the next few years. Still, some analysts feel Sprint could eventually go bankrupt, so investors need to keep a keen eye for the best time to sell and hedge shares of this stock.

Sprint is currently facing a complaint filed by the district attorney of New York for eluding sales tax payments from the July of 2005 up to October of 2008. The state claims that Sprint fraudulently and knowingly allocated over 28% of its fixed-rate call plans as intra-state tax exempt plans in order to avoid paying approximately $100 million in sales tax to the state. The state is seeking $300 million in fines and recovery damages as due compensation. The state also alleges that this was done to gain a competitive edge against Sprint's competitors by saving money on unpaid taxes in order to save customers money on the back end. This has opened Sprint up to further investigations and litigation.

The Louisiana Municipal Police Employees' Retirement System is a pension shareholder fund that is filing a lawsuit against the directors and officers of Sprint for this tax dodging scheme and negligence of fiduciary responsibility. This may eventually lead to a further evaluation and restatement of Sprint's financial results. The Briscoe Law Firm, PLLC along with the securities litigation firm of Powers Taylor, LLP have announced that they will be conducting investigations into the tax evasion allegations as well. This scenario could lead to class action suits, a federal investigation and may compel more states to investigate Sprint as well. Large corporations under litigation certainly is not uncommon, but serious allegations of tax evasion coupled with high debt, low earnings and staunch competitors could be extremely hazardous for the stock price and future operations as well.

Management has been under fire as of late from both investors and analysts in regard to this latest scandal and some of the questionable decisions and direction Sprint is moving towards. Sprint is the last of the three major service providers to contract with Apple (NASDAQ:AAPL) to provide the iPhone for its customers. Sprint will end up paying up to $15.5 billion forthright in iPhone subsidies inside the next five years. Spring is showing the highest percentage of growth in iPhone subscriptions from the last quarter, but this is to be expected since the iPhone is highly popular already and these customers have long been awaiting the smartphone. Spring boasts impressive numbers of new subscribers, but these really are just former customers of Nextel sliding over to Sprint. In losing Nextel and adding the iPhone, Sprint really only gained less than 50,000 brand new customers in the last quarter.

Sprint does have lower rates than its competitors, but this will most likely dissipate if it plans to turn a profit and erase some of the debt from taking on the iPhone. Sprint did break its own records and industry records by increasing ARPU by over $4 from a year ago and with its sixth consecutive quarter of over 1 million total net customer additions and its eighth quarter of positive net additions on its postpaid subscription service. Sprint now has set its all-time record by having 56 million customers as of the last quarter. Still, there are some valid concerns as Sprint has over $7 million in cash flow but over $22 million in debt on its balance sheet. Focusing on the execution of the Network Vision program in order to increase its 4G network to compete with Verizon and AT&T will only increase debt in the short-term and spread operation margins even thinner.

The mounting speculation has even driven the CEO to voluntarily give back the majority of his incentive pay over the past few years because of Sprint's lackluster performance. CEO Dan Hesse is voluntarily relinquishing over $3 million in incentive compensation because of Sprint's poor performance and mounting debt over the past several months. Many question how long the CEO of Sprint will really be in office. He will most likely not be reinstated, not because he is the cause of the recent distress within the organization but more so because he has been unable to stop the bleeding in the eyes of investors and shareholders.

There are a few positive factors aside from the contract with Apple that give investors hope in Sprint's future prominence. Sprint has contracted with China Telecom (NYSE:CHA), a network that covers over 200 cities in the Chinese emerging market. Sprint also contracted with Telecom India to gain 76% percent ownership in the deal that services this emerging market that amounted to over 800 million customers by the end of 2011. Sprint has also been awarded a $2 billion, four year contract with the Western States Contracting Alliance, a purchasing consortium that is composed of 15 states joined together to increase purchasing power under cooperative multi-state contracting. This stock price right now is low enough to ensure a profit in the short-term for aggressive investors that can capitalize on the occasional rallies that are sure to come.

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