Sprint Nextel (S) began selling Samsung's (SSNLF.PK) Galaxy S III recently. Given this device has been one of the most popular introduced this year, it may give Sprint just the right boost it needs to remain a formidable player in the world of mobile communications. In this article, I will explain how this new release will keep Sprint in the smartphone game, and make it a more attractive investment in the near-term.
The Samsung Galaxy S III is a combination of a smartphone and a tablet. It is powered by Google's (GOOG) Android operating system. Eager beavers anxious to pick up the newest and greatest device from Samsung seemed to take the manufacturer by surprise. A main complaint about the device has been the delay in its release and there not seeming to be enough of them to go around.
Since being released last month, retailers have had difficulties keeping the device on shelves. Red flags about the huge demand the device had already garnered was reflected in the large number of pre-order sales.
I know there was a time when the only time people lined up in droves for a mobile phone was when Apple released a new iPhone. However, it seems those times are gone as indicated by the huge demand for the Samsung Galaxy S III. I know that hindsight is 20-20, but I can't help but to wonder what shape Sprint would be in if it had held off on paying such huge subsidies for the iPhone to Apple.
Sprint, the nation's third largest carrier, joins its peer Verizon Wireless (VZ) in selling the Galaxy S III. Other carriers selling the device, which are private, are AT&T Mobility and T-Mobile. Verizon is the largest carrier, while AT&T Mobility is second.
Sprint's selling of the Galaxy S III comes almost a year after it started selling Apple's (AAPL) iPhone. That deal may very well go down as one of the worst in the history of Sprint, although an argument can be made that the acquisition of Nextel was just as horrid.
The iPhone deal essentially amounted to a take-or-pay agreement in which Sprint agreed to pay Apple $15.5 billion over a four-year period to sell the popular phone. Sprint execs have long touted the agreement as a win for the company, noting that the iPhone has allowed it to attract and retain customers who would have gone to its competitors that offered the iPhone.
The concern is whether or not Sprint will be able to sell enough of the iPhones to cover its commitment to Apple, yet alone make a profit. Sprint activated 3.3 million iPhones over the past two quarters. That compares to 11.9 million activated at AT&T and 7.5 million at Verizon.
Nonetheless, how the number of sales of the Galaxy S III will affect Sprint's bottom line won't be determined immediately. Sprint has taken other steps to shore up its finances. That includes offering iPhones to customers of Virgin Mobile, which is one of its prepaid brands. This step was important because it opened up Sprint's market to potential customers who had been unable to buy an iPhone because they did not have contracts with the major carriers.
Also of concern is Sprint's network. Apple's next iPhone is expected to run on LTE network, and may not be compatible with Sprint's 4G network. Sprint stands to lose customers over this.
Sprint reports its earnings for the second quarter of 2012 on July 26. I do hope they are better than the dismal earnings for the first quarter of the year. During that quarter, Sprint reported a net loss of $863 million and a diluted net loss of $.29 per share. That compared to a net loss of $439 million and a diluted net loss of $.15 per share in the first quarter of 2011. The company attributed some of the losses to the depreciation related to its shut down of the Nextel platform.
To get an idea of how much ground Sprint has loss in terms of earnings, look at its profit margin. After dipping sharply in December to -14.94%, Sprint's profit margin has improved somewhat. As of March, it was -9.88%. That compares to Verizon's positive profit margin of 5.97%.
More potential strains to the company's finances relate to its debt load and ability to refinance it. In the spring, Berstein Research lowered its rating for Sprint stock to under perform from market perform. At issue was the amount of debt the company had maturing through the end of 2015. That total is almost $15 billion, so that if Sprint does not "substantially" improve from current levels by then, it may not have enough capital to refinance, according to Berstein Research.
Many counted Sprint out when its stock seemed to be on an endless downward spiral. It has ticked up from its 52-week low of $2.10 and was trading around $3.26 at the time of writing. That's still a ways off from its 52-week trading high of $5.75. I believe sales of the Galaxy S 3 and other cost cutting measures will be key to its future growth. I recommend taking a position in Sprint now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
