Sprint (S) is one of the oldest telecom companies in the U.S. Established in 1899; the Kansas-headquartered Sprint Nextel offers both wireless and wireline voice and data transmission services in the U.S., Puerto Rico and the U.S. Virgin Islands. At the beginning of the century, Sprint was among the top wireless service providers. The company is still the third-largest carrier, offering services to more than 50 million customers. However, investors have lost their confidence in the company, driving down the stock to insanely low prices compared to pre-recession levels. Sprint, which was trading for a price as high as $24, has recently touched almost $2.2. That is a loss of almost 90%.
Back in February, I suggested that Sprint is primed for a rebound. The recent performance of the stock proved me correct. The stock gained about 32% in this year alone. Last week has been a particularly great one for Sprint. After gaining about 4% in the last week, the stock entered into overbought territory. While a stock in overbought territory signals a red flag, I think Sprint could be a highly lucrative investment. From a technical perspective, Sprint just broke its resistance of $3. This is a very important psychological number for Sprint investors. If the stock can stay above this level, it would not face any technical resistance until $4, which will be the next target.
Sprint's largest competitors are AT&T (T) and Verizon (VZ). Contrary to Sprint's desperate need for cash, both AT&T and Verizon are cash-rich companies. Thanks to the steady cash flows from customers, AT&T and Verizon can afford to pay substantial dividends. AT&T's current yield stands at 4.9%. Verizon's yield is slightly lower, and it currently stands at 4.6%. The Beta values for AT&T and Verizon are 0.56, and 0.5, respectively. Compared to Sprint, these stocks offer more capital safety and a dividend income as an added bonus. Therefore, for income-oriented investors, I would recommend AT&T and Verizon, although they seem to be at the pricey side of the market at the moment.
In terms of incremental innovation, telecommunication stocks are among the most promising companies. Thanks to their cutting-edge technological innovations, the world is becoming a global village. There is an ever increasing demand for data services provided by telecommunication companies. According to the Telecommunications Industry Association the telecom market is expected to grow by at least 9% for the next few years.
Recently, Verizon revealed its new shared data plan. The plans, bundled with unlimited voice and text messages are not cheap by any means. A 2GB shared plan between a tablet and smartphone starts from more than $100 bucks. The marginal cost of an additional data plan customer is close to nothing. If it was not for the Sprint's existence, the AT&T - Verizon duopoly would probably be charging much more. It is the existence of Sprint and other smaller competitors that keeps the prices under control. That is another reason why investing in Sprint could be highly lucrative in the long-term.
While larger competitors have better balance sheets, Sprint offers a magnificent return potential for investors willing to take more risk. The debt issue is still a serious concern. Although Sprint generates billions of dollars in revenues, its operating expenses are large enough to eliminate any possible profit. The company is also upgrading its network infrastructure which creates another financial burden.
Sprint has a large stake in Clearwire (CLWR), which has its own debt problems. There is no doubt that Sprint is in serious debt problem. While the debt issue is a serious concern for investors, this is already more-than-fairly priced by the market. At the current valuation, the stock is priced below the book value. The price/sales ratio of 0.27 is well below the industry average. I rate Sprint as a strong buy, with at least 100% potential by the end of this year. The stock is primed for a rebound. It is still not late to jump on Sprint's board and ride the bullish momentum.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.