Seeking Alpha
Hedge fund manager, long-term horizon, deep value
Profile| Send Message|
( followers)  

Back on April 25, Sprint (NYSE:S) reported strong results -- subscriber trends were solid, revenue and earnings beat estimates, and OIBDA (operating income before depreciation and amortization) guidance was revised to the upper end of the previously disclosed range. Strangely, the shares traded down 1.6% that day (a day when the S&P 500 was up 1.3%).

Around that time, I discussed possible reasons for the lack of performance -- none of which seemed to justify the disappointing share price developments. Subsequent to the earnings' day close, however, Sprint shares have proceeded to outperform the S&P 500 by a whopping 27%. With that in mind, let's very briefly examine the possible catalysts for this recent share price movement within the context of beta, industry/peer performance, and company-specific news.

Beta

Sprint is a high-beta stock, and the overall market is down 5.0% since the company's most recent earnings announcement. Therefore, the company's shares would have normally been expected to underperform the falling market. Of course, we now know that the opposite has occurred. In fact, at the bottom of the most recent market sell-off (on June 1 when the S&P closed at 1,278.04), Sprint had already outperformed the market by 11.4% -- a point at which you would've normally expected Sprint to have substantially underperformed.

Closing share price
At sell-off bottom: VZ AT&T Sprint S&P 500
April 25 (day of earnings): 39.48 31.74 2.43 1,390.69
June 1: 41.03 33.90 2.51 1,278.04
Change: 3.9% 6.8% 3.3% -8.1%
Over/(under)performance: 12.0% 14.9% 11.4%
Source: Yahoo Finance

Industry/Peer Performance

Sprint is not alone in it's recent outperformance. Since the time of Sprint's earnings results, Verizon (NYSE:VZ) and AT&T (NYSE:T) have also outperformed the market by 12% and 14%, respectively (vs. 27% for Sprint). As a result, it appears clear that improved industry sentiment has been a large part of Sprint's recent outperformance.

Closing share price
Since earnings-day: VZ AT&T Sprint S&P 500
April 25 (earnings day): 39.48 31.74 2.43 1,390.69
June 8: 42.44 34.55 2.98 1,325.66
Change: 7.5% 8.9% 22.6% -4.7%
Over(under)performance: 12.2% 13.5% 27.3%
Source: Yahoo Finance

Company News

In addition to the support of positive industry performance, Sprint's shares appear to have also benefited from positive, company-specific news. On May 29, the company announced the expected early closing of its IDEN network (to close around June 2013) and a $1 billion refinancing on favorable terms. While both of these news items were positive for Sprint, the shares only outperformed the S&P 500 by 0.8% on that day. Since the day of the announcement, however, Sprint's shares have outperformed the overall market by 13.1% (vs. 1.8% for Verizon and 2.0% for AT&T).

Closing share price
Post-IDEN and refi. news: VN AT&T Sprint S&P 500
May 25 (business day before announcement): 41.45 33.69 2.62 1,317.82
June 8: 42.44 34.55 2.98 1,325.66
Change: 2.4% 2.6% 13.7% 0.6%
Over(under)performance: 1.8% 2.0% 13.1%
Source: Yahoo Finance

The other positive news coming out of Sprint recently was the announcement yesterday that its pre-paid subsidiary, Virgin Mobile, would begin offering the iPhone on June 29. This is positive news as the iPhone should help boost Virgin mobile's sales, while helping Sprint meet its $15.5 billion iPhone commitment with Apple (NASDAQ:AAPL). On the day of the announcement, Sprint shares increased 0.73% (with the S&P down 0.01%).

Today, the shares have increased much further (up 8.76%, with the S&P 500 up only 0.81%). It remains to be seen to what degree today's increase is the result of the market digesting yesterday's news. Given the magnitude of the increase, it seems that there also could be some other (yet to be disclosed) developments and/or technical factors contributing to today's substantial increase. Nonetheless, yesterday's news certainly appears to be a contributing factor to the shares' outperformance.

Closing share price
Post Virgin iPhone news: VN AT&T Sprint S&P 500
June 6 (business day before announcement): 41.77 34.56 2.72 1,315.13
June 8: 42.44 34.55 2.98 1,325.66
Change: 1.6% 0.0% 9.6% 0.8%
Over(under)performance: 0.8% -0.8% 8.8%

In summary, it appears that Sprint's shares have recently benefited from both improved sentiment for U.S. telecom operators and from positive company-specific news. That said, I believe that the shares remain oversold and continue to represent a very compelling risk/reward opportunity. I do remain cautious with respect to news flow from the New York sales tax litigation, but I believe this is substantially outweighed by the additional positive catalysts that I see for the company's shares.

Going forward, I expect the overall news flow for Sprint to remain positive. Subscriber trends in the second quarter should further improve -- as the company's strong product offering allows for continued strong gross additions for Sprint's post-paid platform (where investors are focused). Furthermore, I expect that decreased churn (as the one-off issues from Q1 work through the system) should positively impact net additions for the platform. While I also expect that revenue trends will remain positive, margins should remain under pressure from the company's "Network Vision" and iPhone launch initiative. That said, I believe that the long-term benefits of these programs should substantially outweigh these short-term negatives.

Source: Behind Sprint's Recent Outperformance