Sprint (S) has had recent success as it stock price has increased by around 50 percent in 2012. This is an asset for aggressive investors interested in short-term capital appreciation. However, I believe Sprint's recent success in the market will be short-lived. I think Sprint is headed for the same fate as Nokia (NOK) or Research In Motion (RIMM). Sprint's current business model is troublesome, laden with risk as it depends greatly on the success of its Apple (AAPL) partnership and development of its LTE Network. Both of these plans are a farce at best. Sprint will be unable to compete with the top telecoms AT&T (T) and Verizon (VZ) while taking on a troubling amount of debt to do so. AT&T and Verizon's growth and long-term projections consistently outpace Sprint as it currently struggles to even catch up. In this article, I will explain why Sprint is a risky long-term investment. I believe its viability beyond 2014 is questionable at best.
First lets look at the fundamentals. Sprint's beta is around one. Its EPS decreased by around 93 percent from the previous year but has increased by over 17 percent from the previous quarter. Sales growth has increased by over five percent from the previous year but by only 0.14 percent from the previous quarter. Sprint's price to book ratio is around 0.9 while its price to cash flow ratio is around 3.27. Both the current ratio and quick ratio has increased significantly from Q4 2011 through the end of Q1 2012. The current ratio is around 1.9 while the quick ratio is slightly less than 1.8. Sprint's return on equity, operating margin and net margin are all at a deficit and decreased by around 20 percent from Q4 2011 through the end of Q1 2012. From Q4 2011 through the end of Q1 2012, Sprint's debt to equity ratio increased to around 2.1.
Unlike top telecoms Verizon and AT&T, Sprint does not currently offer a dividend payout to shareholders. Sprint's growth rates for this year and the past five years have been at a deficit and are significantly less than the industry average. Sprint's projected growth for next year is almost four times the industry average while its projected growth for the next five years is a little more than 50 percent the industry average. Its price to book ratio and price to cash flow ratio for the most recent quarter and most recent year are more than half the industry averages, respectively. Sprints net profit margin for the trailing 12 months is slightly better than the industry average while its return on equity is significantly worse than the industry average for the same time period.
At face value, there are many reasons to believe that Sprint's recent upswing in the market is trending towards long-term success. Sprint is the only one of three major telecoms that offers customers unlimited plans for smartphone subscribers. This is a stance that Sprint has been championing to differentiate it from AT&T and Verizon. Sprint also contracted with Apple to provide the iPhone to customers shortly after Verizon. It's the only one of three major telecoms to offer prepaid iPhones without the need for contracts. Much like Verizon and AT&T, Sprint recently announced the development of its 4G LTE network in some of America's major cities. Sprint is also expanding its Ethernet network and has upgraded the Sprint Biz 360 portfolio for small businesses.
The unlimited plans and the prospect of the proliferation of Sprint's 4G LTE network are the main catalysts driving the outstretched uptick in Sprint's stock. The idea that Sprint is preparing for a successful launch and assimilation of the iPhone 5 is certainly appealing, at face value. But the unlimited plans and investment in the 4G LTE network could eventually be the source of Sprint's demise. Sprint has over $20 million in debt; it claims it needs at most another $7 million for the LTE network. Industry experts expect LTE networks could ultimately cost as much as $10 million. Sprint's unlimited plans currently run slower than AT&T and Verizon's plans. Sprint plans to cut the Nextel network to make way for the development of its own LTE network. Cutting Nextel creates an opportunity for Verizon and AT&T to lure former Nextel customers away from Sprint to subscribe to their own respective push-to-talk platforms.
Verizon's 4G LTE network has 300 cities, AT&T has 41, and Sprint has only five. It simply lacks the resources to create a competitive LTE network with these major telecoms. There is also a reason Verizon and AT&T pulled their unlimited plans, it stifles earnings and is not viable long-term. Sprint's revenue suffers with this plan, in conjunction with the option to avoid contracts; there is nothing to stop these subscribers from leaving Sprint once they grow tired of an inferior service. Sprint has also undersold on its Apple contract thus far. It contracted for over 15 million phones; it's sold less than 4 million year-to-date, while the iPhone 5 will be released later this year. Sprint is certainly not as bad as Research in Motion or Nokia at this point, but it certainly is flirting with the notion and could be headed down the same road in within the next few years. It's overinvesting into long-term prospects that are creating additional and substantial near-term debt liabilities. The earnings from the these long-term investments may never come to fruition as AT&T and Verizon are continually outpacing Sprint's operations and offer superior products and services to consumers and businesses.
Investors and current shareholders may benefit from some short-term capital appreciation when the iPhone is released and the Sprint's LTE network is further developed. The lack of substantial future revenue to offset the superfluous amount of debt Sprint is currently taking on will leave Sprint susceptible to bankruptcy or an acquisition by one of the major cable companies in the future. Apple and Verizon have superior sales and networks. In long-term projections, it's difficult to see Sprint retaining subscribers, managing its debt or surviving without some serious help.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.