Sprint Is Still a Steal at Current Levels

Based on the intrinsic value of its spectrum holdings and its business operations, Sprint (S) is still a steal at its current market cap.

Analysis

A recent article by Ben McClure in response to my blog post suggesting circling sharks around a wounded and bleeding Sprint reasoned that at the current market cap of around $18B and $6 and change per share, this stock is not a good investment for bottom fishers.  Mr. McClure writes:

"At a share price of $6.76, the company has a market capitalization of about $18.8 billion. Let's assign to Sprint Nextel a forward PE ratio of 16, about the same PE ratio attached to Verizon. Based on that multiple, Sprint Nextel will have to produce about $1.2 billion net income or an EPS of 41 cents per share in 2008 if share prices remain constant. Yet, Wall Street earnings estimates say that this number is well beyond reach. Analysts say the company is on track to produce just 8 cents per share in 2008 according to Market Watch."

Clearly, by this reasoning, Sprint, at a PE ratio of 16 and earning of 8 cents a share would indicate a share price of around $1.25.  The underlying argument is that there's still substantial downside risk to Sprint.  If Sprint were to go as low as $1.25 a share, this would equal a market cap of $3.5B!  I'm sure one could construct an argument for the share price going even lower by adjusting the PE ratio to, say, 12, to reflect that Sprint underperforms relative to its peers. 

Another calculation, though, would set Sprint's value much higher, looking at the piece parts.  A rough calculation valuing Sprint's spectrum holdings at $1 per MHz - pop for iDEN spectrum at 800 / 900 MHz, $.75 per MHz - pop for PCS spectrum at 1.9 GHz, and $.50 per MHz - pop for WiMAX spectrum at 2.5GHz, easily yields an intrinsic value of over $10B.  By being even more conservative and downgrading the value of Sprint's spectrum holdings by 20% to $8B still leaves one to argue that, with current debt being factored in, the remaining bricks and mortar, equipment, iDEN, long distance and IP / wireline, CDMA and WiMAX businesses together are worth only $8 - $10B at the current stock price.

By my reckoning, the depressed stock price is in large part due to historically and entrenched (below the  current CEO) decision making, leadership and management, manifested in customers so dissatisfied that they leave the network, despite network quality and reliability being good.  On the iDEN side, dissatisfaction is compounded by ongoing uncertainty of iDEN in Sprint's long term architecture (iDEN has no evolution to broadband), despite well intentioned and genuine best efforts on the part of CEO Dan Hesse to reassure customers that iDEN will be around for the foreseeable future.

Sprint, in the eyes of investors and customers, at this point has approval ratings like the Bush Administration:  They have screwed up in such an extreme manner for so long that the negative sentiment has become so deep-rooted that it's hard to see how any recovery is possible. 

In the case of Sprint, though, it really is hard to see how conditions can get worse.  Hesse has already prepped investors' expectations by forecasting a large subscriber loss for first and second quarter, 2008, as iDEN continues to bleed perhaps unprecedented subscribers in the wireless industry.

Sprint does not have time to wait for Qchat to become operational over the next year.  Sprint also doesn't have time to wait for the WiMAX build out to mature over the next three years.  I believe that Hesse understands this situation.

The short term key is iDEN.   The problems on the iDEN network are exacerbated  when you realize that when subscribers churn off, they don't do it in one's or two's at a time, but in groups, due to the unique group call capability of push-to-talk that business customers love.  An optimist would see though that group calling is still a differentiated technical capability that Sprint controls with iDEN and Qchat, and that, if Hesse is able to turn around iDEN, then the heavy churn can drop as dramatically as subscribers choose to stay in groups instead of leaving.

Conclusion

When looking into the abyss, it's easy to imagine an infinite drop into the darkness.  On the other hand, the drop may only be a few feet.  I believe iDEN will stabilize before the end of 2008.  When that happens, the emotion depressing Sprint's stock price will burn off and the price will bounce back. So, for now, if a suitor can put together the financing in the current credit environment, now is the time to acquire Sprint.

I'm reaffirming my previous position that Sprint is a steal at its current market cap.

Disclosure: Long S

Comments

[Nextel Acce...:]

I believe this to be correct. Sprint can turn this around, it will just take some time.

2008 Apr 21 08:59 AM

[Sprint User:]

Dan Hesse has already turned the business around, it's all market perception now. Both the iDEN and CDMA networks are operating a best-ever levels, billing has been re-vamped and simplified and the company is investing more into customer service than any other carrier. Existing customers (like me) that stuck with Sprint and new-to-Sprint customers can see how these changes have paid off.

2008 Apr 21 11:14 AM

[Exsprex:]

With the current state of the US Dollar, Sprint looks even better when viewed by 'non dollar denominated' suitors. Sprint is fixing what's wrong and has great assets - superior data network and approx 50+ million customers. But the Board of Directors is unlikely to approve any buyout offers that would interfere with / damage their job generating engine in KC. This Board is more concerned about the health of the economy in KC than about delivering shareholder value to ALL shareholders. The Board elections are coming in May. These guys - especially Hockaday- need to be shown the door. Otherwise, a buyout will have to be of the hostile variety and not likely to happen. For those of us shareholders who do not live in KC, the prospect of a limp along future vs a spectacular turnaround rides on the outcome of the May elections. Don't throw away your proxies!

2008 Apr 21 11:58 AM

[Sprint Obse...:]

Ed makes a lot of sense in this article. With the value of the spectrum and the two networks and the quality of the service always improving there should be a higher value on S. This value is about to be enhanced by the ever increasing demand for data services by mobile users. As for customer service...I've used it many times and had a very positive experience. Dan Hesse still has a challenge changing Wall Streets negative perception of S and he is right to address that by his focus on getting the company back on track.

2008 Apr 21 12:04 PM

[xnext:]

Well said exsprex. It's all about OP/KC. They could've gotten $5B a few months ago from SK Telecom and partners, but that would've required boards seats and may have jeopardized the entrenchment in KC. Think they could use that $5B now? Why do you think they hired Hesse, because he was the best CEO available? Hell no, it's because he was already in KC. I've already voted and I voted everyone out, except a very select few. Hesse may turn it around, but he's got to get rid of the entrenched bureaucracy at OP. Otherwise, it'll be a slow dissent into an abyss of market irrelevance, subscriber losses and continued loss of shareholder value.

2008 Apr 21 06:14 PM

[idenguy:]

Kind of hard to change the Wall Street perception when you are bleeding 1 million + subs a quarter.

2008 Apr 22 12:58 PM

[Exsprex:]

So true, idenguy. That 5 billion infusion [that wasn't even considered by the Board] could have stopped the bleeding by now. Painful to think about what the stock would be worth had the Board accepted the SK Telecom offer. I am surprised that the shareholders have not yet filed lawsuits. I wonder if the bond holders are preparing to do just that.

2008 Apr 22 04:11 PM

[easygo:]

I am hoping that the 99$ Simply Everything Plan would reduce some of the bleeding.

2008 Apr 22 05:56 PM

[mhp4sprint:]

Buy Sprint and get ready for a payday sooner than you think.

2008 Apr 22 09:29 PM

[User 201447:]

What can a person do when thay beleave that Virgin Mobile is stealing money air time from customers, After toping up there phones, Thay talk what plane would like and give you the business !!!!!!!!! stingerforce

2008 May 29 12:39 AM