Sprint Nextel (S), operating in two separate business segments, wireless and wireline, provides communications products and services to its diverse customer base throughout the U.S., Puerto Rico, and the U.S. Virgin Islands. Along with the privately held T-Mobile, and the two giants of the realm, AT&T (T) and Verizon (VZ), Sprint is one of the four major players in domestic wireless telecommunications. After reaching a two-year high of around $6 in the late spring of 2011, the company has watched its stock plummet late last summer to under $3. Since October of 2011, the stock has stabilized, trading in a tight range between $2 and $3. Sprint has a market capitalization of less than 10% than that of AT&T and Verizon. It grew total revenues by about 4% in 2011, and it also had an operating profit for the first time in years, although it still lost money on a net basis. Where does the share price go from here?
No dividends here
Sprint is not AT&T or Verizon, and it should not be confused with the two behemoths. However, it does make sense to compare it to those rivals as a potential landing spot for your investment dollars. Whereas AT&T and Verizon both reward shareholders with dividend payouts of around 5% per year (AT&T's current yield is 5.5% and Verizon's is 4.8%), Sprint has not paid its shareholders a dividend since the end of 2007. Not paying a dividend is not necessarily a bad thing; it frees up a lot of cash for the company to pursue growth opportunities, for one thing, but it does mean that Sprint will need share price appreciation at least 5% greater than either AT&T or Verizon to make it a more attractive investment.
Nimbleness and growth comes with a price
AT&T and Verizon are truly diversified across wireless and wireline. The same simply cannot be said for Sprint. Whereas Sprint gets about 87% of its revenue from wireless, AT&T gets only slightly more than half of its revenues from wireless, positioning itself as a national leader not only in wireless, but in wireline cable, internet, and phone service to homes and businesses. Verizon gets just over 60% of its revenue from wireless. Not having another major segment of income, if Sprint were to suffer a hit to its wireless business, it would be catastrophic to the company.
However, with revenues that are only a fraction of those of AT&T's (one-quarter) and Verizon's (one-third), the company has opportunity for more substantial growth than its wireless rivals. Growing a revenue base that is already north of $100 billion at more than a few percent a year can be tough to do, and this is the problem faced by AT&T and Verizon. Sprint, however, was able to grow revenues by 4% in 2011, to just under $34 billion, and it grew revenues in the first quarter of 2012 by 5% on a year over year basis. The company has shown the ability to land major contracts, which they hope will lead to a successful 2012.
It's pretty cheap
Sprint is indisputably cheap when compared to its peers. At current share price levels under $3, Sprint trades at a Trailing Twelve Months (TTM)Price/Sales ratio of 0.23. Its Price/Book ratio is 0.74. A Price/Book ratio below 1 implies that the company is trading for below its intrinsic breakup value (Total Assets less Intangible Assets and Liabilities).
AT&T trades at a TTM Price/Sales ratio of 1.55, while Verizon's TTM Price/Sales ratio is 1.05. Both AT&T and Verizon have Price/Book ratios well above 1. The smaller MetroPCS (PCS) has a TTM Price/Sales ratio of 0.48.
These ratios should limit your downside exposure on Sprint. However, regardless of how cheap Sprint may look on a Price/Sales or Price/Book ratio, if it can't generate net income and positive cash flow, it's not a stock worth owning. The company had net losses in 2009, 2010 and 2011.
The days of losing customers has come to an end?
Sprint has been losing customers for years. Part of the reason for this is that it has lagged the competition in providing its customers with a reliable, next generation, high-speed network. Verizon and AT&T are the only wireless providers that offer 4G LTE connection speeds. Sprint offers its customers so-called "4G" service in an agreement with Clearwire (CLWR), a subsidiary of Sprint Holding Company. Clearwire's technology and network speed, however, lags the 4G networks offerings of AT&T and Verizon. This may, however, be changing. In May, the FCC adjusted their rules regarding the use of the 800MHz wavelength, rights that Sprint obtained in its 2004 purchase of Nextel. In response to the FCC's ruling, Sprint said in a publicly released statement:
Today's unanimous vote by the FCC paves the way for Sprint and other 800MHz licensees to deploy advanced 3G and 4G technologies in the band. Doing so will enable a better customer experience for consumers and a more efficient use of spectrum.
Sprint was late to the iPhone game, and the company believes this is the single biggest reason for its net customer losses in recent years. However, this all changed in October of 2011, when Sprint first offered service to iPhone customers. The company managed to add about a quarter of a million customers in the first quarter of 2012 after it added more than a half a million customers in the fourth quarter of 2011, its first two reporting periods since the iPhone was brought into the mix. Sprint, it must be noted, had to commit $15.5 billion to Apple (AAPL) over a four year period.
I would wait on Sprint. The FCC's new ruling may allow them to compete better in advanced 3G and 4G service, and the company's big bet on the iPhone may lead to enough subscriber growth to make it a winning investment. However, the company has to prove it first. Watch that bottom line number more closely than subscriber or revenue growth in the coming quarters. If it starts ticking up, Sprint may warrant your attention and your money.