Sprint: Bold iPhone Move, Fitch Affirms Rating, Outlook Negative

| About: Sprint Corporation (S)

It was a big news day for Sprint (NYSE:S) on Monday. The telecom company made a bold move in terms of the iPhone, and also saw its ratings affirmed by Fitch. Shares have rallied hard over the last few months, but have been stagnant in recent days. Let's look at the latest news cycle and where that leaves the stock.

Sprint cuts iPhone price:

Sprint made an interesting move Monday night, in an attempt to clear out excess inventory of Apple's (NASDAQ:AAPL) iPhone 4S. The wireless carrier decided to cut the price of the iPhone 4S by $50 in attempt to boost sales. You can now get the 16 GB iPhone 4S for $150 and the 32 GB and 64 GB for $250 and $350, respectively. In addition, according to Sprint's website, if you sign up online, they will also waive the $36 activation fee. For those of you that are curious, this seems to be a Sprint-level only move. It does not appear that Sprint will lower the selling price at Virgin Mobile, one of its prepaid brands. Sprint announced Virgin Mobile was getting the iPhone in late June.

This is a very interesting move for the carrier. Apple has planned a media event for the week of September 9th, and it is expected to launch the new iPhone at that event. iPhone sales tumbled in the most recent quarter as consumers hold back purchases in anticipation of the new phone. Apple, which sold 37 million iPhones in fiscal Q1 of 2012 and 35 million in fiscal Q2, only sold 26 million in fiscal Q3. Given the company's most recent guidance, it appears that this quarter is expected to produce sales in the 20 to 22 million range. We saw a similar trend in fiscal 2011, but not to this degree, where sales declined from over 20 million in fiscal Q3 to just over 17 million in fiscal Q4.

So far, we have not heard any response from Verizon (NYSE:VZ) or AT&T (NYSE:T), which in recent quarters, have sold two to three times as many iPhones as Sprint. However, Sprint is poaching customers, and new iPhone customers have made up 40-44% of the total in the first few selling quarters. I don't see Verizon and AT&T reacting to this move right away, but they might need to. Sprint could easily steal tens of thousands of new customers here, and building that subscriber base is just what they need to do.

Sprint's move here is quite interesting. While they will take an upfront hit in revenue ($50 plus the $36 for waived activation fee), any new customer they sign up could break even in revenues in the first month or shortly thereafter. It could take a little longer to break-even customers that were upgrading, because they already are paying monthly service fees to Sprint. It will also take a few extra months to recover the lost "profits" from this move. But Sprint has taken another shot at Verizon and AT&T, and gaining a few thousand extra customers could be a long term positive.

Fitch Affirms Ratings:

Also on Monday, ratings firm Fitch affirmed its B+ rating for Sprint debt, with a negative outlook on the name.

The headline review from Fitch is the following:

"Sprint Nextel has significantly fortified its liquidity position and reduced medium-term refinancing risk since late 2011. The past two debt issuances and vendor financed secured credit agreement raised an additional $7 billion of financing. During this time, Sprint has also repaid $3.25 billion of maturing debt. The company's liquidity at the end of the second quarter 2012 was approximately $8 billion, including $6.8 billion in cash. In addition, up to $500 million is available through May 31, 2013 under the first tranche of the secured equipment credit facility. The current liquidity helps address Sprint Nextel's material cash requirements expected through at least 2013 which could be in excess of $5 billion due primarily to the network modernization project and iPhone rollout."

Fitch points out that between 2013 and 2015, Sprint has $4.8 billion worth of debt coming due. Also, Sprint has a $2.24 billion unsecured revolving credit facility expiring in October 2013. At the end of the latest quarter, Sprint stated that it had $1.2 billion of available funds on the credit facility, meaning they have used $1 billion, which would also be due late next year. According to Fitch, the leverage ratio for the covenant on the credit facility is currently 4.25x and will reduce to 4x beginning in January 2013. As of June 30, 2012, the ratio was 3.4 to 1.0 as compared to 3.7 to 1.0 as of Dec. 31, 2011. It appears that the leverage ratio being used its total liabilities divided by current assets, based on the numbers given by Fitch. Should Sprint's current assets decline in the next two quarters, it could hit that covenant. Based on the liabilities at the end of Q2, current assets falling by $1.7 billion would hit the covenant. Fitch expects the leverage ratio to be in the low 5X level during 2012.

Fitch expects Sprint to seek additional funding later this year to cover the pending maturities and expiring credit facility. Fitch says that Sprint is also planning to receive $1 billion to $2 billion in additional secured vendor financing. If they do, Fitch says it will downgrade the ratings on Sprint's unsecured debt, due to the reduced likelihood that it will be paid back.

Fitch affirmed its negative rating on the name, and stated there are no material impacts likely to warrant a rating upgrade on the name anytime soon. Fitch says it will not adjust the negative outlook during 2012 because of the following:

"The ratings have limited flexibility for execution missteps, weakened core operational results, significantly higher cash requirements, Clearwire (CLWR) event risk or lack of expected benefits from the network modernization project."

Conclusion / Stock Movement:

The move to cut iPhone prices (and activation fees) is a bold one for Sprint. The company obviously is trying to clear its inventory of the 4S before the new model hits in the next few months. While Sprint would take an upfront hit from some lower selling prices, it should recover the lost revenues over time. This should help the company to gain some more iPhone customers during what should be a weak sales quarter for the phone. We'll see the true result of the news in the percentage of new customers that bought iPhones when they release Q3. For now, Verizon and AT&T have not responded. We will wait to see if they do.

At the same time, Fitch affirmed its debt ratings on Sprint, but kept the outlook negative. Sprint does have a lot of debt, and if results do not improve as expected, the company could need to refinance at higher rates. Fitch notes a number of risk factors, including low iPhone sales, not recognizing cost benefits from the network modernization, a Clearwire event, and more.

As for Sprint stock, it currently trades for $4.32, up almost $1 since the latest earnings report, but down from the recent high of $4.60. Sprint has rallied from $2.25 in the past couple of months. For investors that have been in this trade since the lows, I would suggest taking some profits here. For new investors, I would recommend shorting the name, or not purchasing shares until they retreat some more. Sprint will continue to post massive losses for the indefinite future, and the fact that they continue to hold $6 billion to $8 billion in cash on the balance sheet leads me to believe they may need more financing. If this company was truly turning around, they would have repaid some more of that debt by now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.