I feel a little bit late to the party on Sprint (S). It was on my radar from $2.30 and I thought it might be a great investment, but there is no way for me to prove that to you. So let us focus on the current state of affairs. I may be late for this huge run we have had recently, but everything I have seen when looking at Sprint tells me that there is still time for me to make a good profit, while minimizing the effect of buying too late. Do not want the accusation here to apply to me. That article is a good place to start to get some background on recent events.
I think Sprint is doing a fantastic job of executing on its big plan. I think management is really trying very hard to come up with good solutions to the issues. Cash is tight, and Sprint is doing its best to make every bit count. An example would be Sprint's attempts to maximize spectrum through efficient utilization and new technologies before raiding the coffers for more. When we look at Sprint we should look for its own strength and progress, but also study its practices so that we can learn to spot other companies that are stampeding toward renewal. Now let us start by looking at some financial statements.
The statistics for Sprint look bleaker than the recent run would lead you to believe. Both the debt-to-equity ratio of 2.102 and the long term debt of $22.27B are enough to give one pause. You have to look past these. Yes, this is a concern, because it cannot be taken for granted that a company will properly use leverage. That was a concern before, but Sprint seems to be a good job of putting that debt to good use.
The one thing you should take away from that is how long it will be before Sprint can reclaim its status among such industry bigwigs as AT&T (T) and Verizon (VZ). The debt is likely to be a bit of a drain on the company until it is reduced to more acceptable levels. For a point of reference, T and VZ both have debt-to-equity ratios below 1. Telecoms tend to have higher debt, and it's unsurprising during a time of network upgrades and expansion. I do like the $7.572B in cash and short-term investments. Having that buffer will let Sprint stay nimble, and quickly capitalize on any opportunity that presents itself.
The last thing I am looking at is the outstanding short interest. This is not part of the financial statements, but I was eagerly awaiting the mid-July short interest data. The short interest seems to be flat, which is surprising considering its recent run. Obviously end of July data will be more pertinent, but Sprint was still rising through early July. The book value per share is $3.533. We are sitting right there now. Since short interest has not substantially declined, then Sprint achieved a fairer stock price through buying and not short covering. End of July data will be critical to confirm this, but I like Sprint enough to own it without a short squeeze. However, so far signs are pointing toward an upcoming rise in stock price because of short covering. Not to say it will be a massive squeeze, but even some upward momentum would be welcome. Especially, considering my strategy below.
Sprint had liquidity concerns in 2011, but showed that it can still access capital markets and secure vendor financing. Sprint is doing what it can to avoid selling more stock to raise funds, which was a concern.
I think Sprint has done a great job of utilizing its debt effectively. So much so that if the stock price bounces higher, I would not mind a small secondary offering to raise more cash if it came to that. Sprint has shown it uses the money it raises effectively, and the benefits of the offering should outweigh the damage to the stock in the long run. I hope a stock offering does not happen, but I would not be lighting my Sprint shares on fire if it did happen.
Sprint's Ability to Touch the Soul of the Consumer Through the Wallet
The first indicator I had of Sprint's ability to raise from the ashes was by observing those around me. Once Sprint offered the iPhone and became the only unlimited plan so many people switched. The unlimited plan was also cheap when compared to the capped data plans of competitors. I warned these people that unlimited data with the iPhone almost crippled AT&T's network in dense areas like the one I live in and you probably will get terrible speeds that will only get worse. I was scoffed at, mostly because it was cheaper. I guess lower quality freedom is preferable to higher quality restraint, such as an unimpressive house being better than a fancy jail cell.
I saw a similar effect with Netflix's (NFLX) streaming product. Originally people thought it was a great service, but I disliked the lack of good content on streaming. Then NFLX revamped its pricing structure and charged for streaming separately, and bumped up the price, in order to get better content. Its customers almost staged a rebellion. More for less seems to be the mantra of the current consumer, but the more does not need to be particularly impressive. Especially since you can't jump to one of the other major carriers and get better speeds without paying much more now and being limited. The people around me were all hopping aboard the Sprint train and that was my first sign to look into it.
If Sprint can keep winning customers it will keep the revenues flowing in. I am not looking for customer and revenue gains that will go down in history. I am looking for anything that will take the pressure off Sprint, and let it upgrade without tapping more leverage. Then it can focus on growing the customer base at a breakneck speed.
One mention is Sprint's ability to play the open borders card in order to win customers from VZ and T. Sprint still offers an unlimited plan, and its marketing materials heavily emphasize that it is the only nationwide unlimited plan. Then there is the recent face time announcement. This time Sprint preempted T and VZ. Finally, there is the prepaid iPhone plan, which ends the smartphone subsidy but frees you from the two year ball and chain.
Sprint is making an effort to offer more expansive services and flexible services. If this catches on then in 10 years we might be saying that Sprint was the cause of a major shift in the mobile industry. It could mark a change from the two year complicated agreements with all the hidden fees, and the sometimes steep subsidies of smartphones. Separating the gadget and the service might be great for carriers who provide plans that you can pop in and out of. All of this is an effort by Sprint to appeal to the consumer, and I think it will pay off well.
Sprint and Macroeconomic Gloom: A (Temporary) Friendship of Convenience
The gloom in the market is bad for Sprint's stock price, however if you focus on the fundamentals for the company for now the gloom actually works out well. Sprint has committed itself to its Network Vision plan. Management is not as concerned with showing fat earnings per share, or maintaining or increasing a dividend payout. Sprint has stomached the thought of making large capital expenditures. T and VZ are following, but in my opinion they have boosted that later than they should have. Also, both companies won't remove their dividend because that is the reason lots of the shareholders are keeping their shares. Sprint has none of those concerns. Most shareholders in Sprint understand that it is going to be writing checks to develop its network.
This commitment to CapEx is a good thing in my opinion. The reason is that the vendors are hurting in this economy too. Sprint has the wiggle room to negotiate good deals and bulk pricing. I am not certain we would see a lot of news about these deals, but it would just improve the fundamentals over time. This comes mostly from experience and conversations with people. It seems logical that vendors would offer discounts to coax reluctant buyers.
There is one last advantage I see, which may or may not be real. When T and VZ built their networks and opened the floodgates of smartphone data usage they were caught unaware. We saw the struggles T had to live with during its unlimited era. VZ was taking so many digs at T for coverage, then quality. AT&T's network was stretched so thin and it could focus on coverage or speed. T also had to keep shelling out money for spectrum. That is a still ongoing issue, and spectrum is expensive and can be full of headaches. It is a highly limited resource, and unless the laws of physics change this will not change any time soon.
Now that Sprint has to build its network from the ground up it can build it with a focus on data usage, rather than taking a patchwork approach that T and VZ had to take when they got caught in the mobile data storm. Primarily all the recent technology aimed at Wi-Fi and stretching spectrum as much as possible. Being late to the party has serious drawbacks, but I am trying to look for a silver lining. Sprint can also utilize all the technology developed for the mobile data boom, while T and VZ used older technology first and now have to upgrade.
A parallel scenario from history would provide more clarity for the paragraph above. After WW2, many countries had their means of production destroyed such as Germany, Japan, etc. The United States did not see war on its soil. The countries with destroyed factories had to spend money to make new ones from scratch. They could build them with all the current technology, while the American factories were built at various times before the war with a mix of older and more recent technology. They had to upgrade as they could, because they had not committed to high expenditures to retool their whole business. Those older factories eventually fell behind the newer factories overseas. The US had been a manufacturing giant during and before the war. We were cranking out war materiel and afterwards civilian products. Eventually that dominance faded. Thankfully, the US moved to the high tech industry, but the story is clear. Being forced to start from scratch with all the most recent technologies can help in the long term.
Discipline Forged in the Fires of Difficulty
Sprint's situation means that management has its thinking cap on. Management needs to look for the best solutions not just take whatever is popular among competitors. It needs the best and as cheap as possible. If quality is sacrificed for price, it will cost more down the road. Sprint's management has to live with this understanding if it is to be successful. All companies should think about things that way, but that does not mean they will.
I think we are seeing signs that these good practices have taken a hold at Sprint. There is no way to reach inside the minds of the individuals and prove this, but the results will hopefully speak for themselves. This is critical because good practices pay off later. The practices might not pay off now, but good practices always consider the big picture. This is important for my specific strategy to benefit from Sprint and Credit Suisse's $6 target, and for anyone that wants to own Sprint 3 years from now.
The cost controls that have been implemented should be good for the company once it starts focusing on being extremely profitable. If it can control spending and costs even more then it should be fantastic when the company starts generating real revenue growth. Keep your eye on the prize with Sprint, because of the three big carriers Sprint is the only one with the potential for serious capital appreciation. Missteps might occur, but I think this management has shown that it can deliver on Network Vision. Management has taken a lot of pressure off Sprint, and now the company has some breathing room.
The Technical Picture
(click to enlarge)Chart Courtesy of StockCharts.com
Not going to go into cryptography mode on this chart. It is pretty basic. The most important thing is the cross of the 100-day and 50-day simple moving averages supporting a bull bias. We do not have any local highs that are reversal points on this chart. The only little spike in this price range was back in September 2011. It is the little black wick back in September off a bounce from a downtrend. This probably is not a real resistance line. We will have to wait and see. Overall the chart tells me that there are no clear obstacles. Technical analysis is not my forte; I just use it to inform entry.
The Only Late Entry is No Entry
Sprint has appreciated quite a bit. I do not want to be one of the people jumping on the bandwagon, but I think Sprint has some legs. I think I would still buy some shares to hold onto for a year or two. However, since it has already appreciated I would not take a huge position size. I am looking at Sprint LEAPS, which some might call riskier than buying shares but at least I do not need a lot of money. The $5 January 2013 calls are still pretty cheap, $0.21 as of close July 26, 2012. That is not too bad - it gives Sprint 4 months to shoot higher. At $0.21 I am not too worried about time decay. For $21 per 100 shares I can capture 100% of the movement past $5. If I assume the premium will not appreciate then I will capture anything above $5.21.
If you think Sprint can do really well you can go for the $5.50 January 2013 calls going for $0.13. I might grab the $5.50s for January 2014. This might be too far for some people, but I would have to put much less capital at risk. Obviously I would not make much if Sprint just reaches $4.50 in the next year and a half, but if Sprint was going to move that slowly I would be looking at something else. The bid on the January 2014 $5.50 is $0.50, which is up from the $0.39 during the first draft of this article bit over 25% gain so far. I might wait for some really bad news to hit the market and grab them cheaper. They are so long dated I am not worried too much about time decay.
I like this strategy because it builds my timeframe, my exit, and my maximum allowable loss right from the outset. In these volatile and untrustworthy markets that sounds fine to me. Immediately on entering the position I have a plan.
I might still grab some Sprint shares, but not as many as I would have had I done some more research in the $2.30s. I would rather roll that cash into the options. For you long term investors out there, I think $6 is conservative. I do not want to project too far out but going past $10 in 3-5 years is eminently possible. Sprint is a telecom. These are known for dividends. This will eventually become a dividend play. So if you buy here you might own a "forever stock." I find the term forever negotiable, but collecting a dividend is fine by me after growth slows. Might reinvest the dividend right into Sprint, but this would be after I took some large profits. I like Sprint, and I like my LEAPS strategy.
Nothing is without Risk
Call writing has been heavy for Sprint at $4. This could mean many investors are seeing a cap on gains after $4. My opinion is that people are scared right now. Markets have been rough and we are just waiting for a ton of bad news. They might think Sprint moved so fast in so little time that should be about it before Europe haunts us again, or Congress plays chicken with the fiscal cliff.
The other risk is that Sprint does not keep growing. Sprint might grab some people from T and VZ and then just stop gaining subscribers. In that case Sprint might have a hard time meeting its obligations. This is just a very broad and general risk shared by many companies. What if business does not go well? Well that is bad. It is not complex. Sprint's heavy debt load makes this risk slightly more acute. Just be aware of it.
Liquidity is not a near-term concern in my opinion, but if Network Vision starts costing more than expected then it could be a problem. Pay attention to the upcoming earnings, and evaluate all that for yourself. I might write a follow-up after earnings.
The risk in my LEAPS strategy is that Sprint does not move that much. If it gets to $5 and sits there forever, then I would lose on my LEAPS. You would have made more just buying the shares. Choose your own strategy. I have tried to provide analysis that applies to both paths. I just do not want a substantial amount of my capital tied up if Sprint does slow down. I will not be investing an equal dollar amount in LEAPS as I would to buying the shares. Meaning, if I would buy $10k worth of shares I will not be buying $10k worth of LEAPS. I would go smaller. I would only risk what I am willing to lose for the potential gain I see, $1-$2 per share over the next year and a half with a bit more gain early on.
Note on Earnings
I have updated sections to allow for the passage of time, but most of the analysis remains the same. I was nervous about earnings, but Sprint did well. I think the market will take it down a bit though, after all the loss grew, and Europe is rearing its head again. The bit about call writing at $4 will be put to the test now that we are sitting right there.
Additional disclosure: Through options, might be longer if I wait for a rough day in the market. Originally I wanted it before earnings, but decided to hold off in case earnings season had unwelcome news. My mistake. Might wait for another really bad week if S has a good run after earnings.