On August 13, Sprint Nextel (S) shares broke through the $5 mark for the first time in over a year. Shares in the company are now up over 115 percent since the start of 2012 and over 40 percent since the telecom company reported its Q2 results in late July. See a 2012-to-date chart for Sprint:
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While the company may return below five dollars due to some profit taking, this recent move up could result in continued strength in the coming weeks. Once a stock goes above five dollars, a far larger universe of potential investors exists. This is largely because many investment funds and most open end or mutual funds have policy restrictions that govern the investments they can make. Such rules generally require a particular level of diversity and restrict the fund managers from investing in equities that are valued below five dollars. As a result, provided Sprint can stay above the $5 mark, it should find at least some demand for shares coming from this sizable portion of the market.
Beyond funds, many additional retail investors might now become interested in Sprint. Several traditional brokerage accounts restrict investments in what are known as penny stocks. A penny stock used to be defined as an equity that traded for less than one dollar per share, but the SEC expanded the definition to include equities below five dollars, because such equities are perceived as very risky investments. Though most individual investors that have modern self directed investment accounts are not so restricted, many retail investors that rely upon traditional brokerage accounts, and brokers, are.
Additionally, and because of the above-mentioned stigmas associated with a price below five dollars, many analysts are reluctant to recommend or upgrade equities that are below five dollars. After all, there would be little point in stating that a company is a buy, if a client will see that and contact their broker only to discover that they are restricted from owning it. To this end, Bank of America (BAC) upgraded Sprint from neutral to buy on August 13, just as Sprint crossed through this industry-prescribed dividing line. Bank of America put a price target of $6 on Sprint shares, up from its prior target of $4.50.
Similarly, brokers do not suggest restricted stocks to their clients because there is little point in mentioning an investment that cannot be made. Now, though, some will likely begin to speak of Sprint using terms such as bullish trend and breaking through resistance, both of which are currently true.
NEW NEWS & NETWORK CHANGES
Since reporting its second quarter, little new news has come out for Sprint, but some has. The company continues to roll out its LTE network and this week, Sprint started taking pre-orders for the Motorola Photon Q, a world roaming 4G LTE smartphone with a complete physical QWERTY keyboard that will be available in stores next week.
Sprint will likely continue to make additional devices available through its developing LTE network, including the next probable incarnation of the Apple (AAPL) iPhone and the current iPad. Sprint cannot directly provide a data plan to an iPad, which requires an LTE network, though a Sprint smartphone subscriber could use their phone as a hotspot for their iPad or other device.
Sprint's efforts to increase its LTE network will coincide with continued steps towards deactivating the now obsolete Nextel network it acquired in 2005. Sprint still had 4.4 million subscribers on the Nextel platform at the end of Q2. On August 10, Sprint commented that the Federal Emergency Management Agency ("FEMA") has switched from the Nextel network to Sprints new push-to-talk service known as Direct Connect.
According to Sprint's Q2 report, its sales rose 6.4 percent to $8.84 billion, beating average analyst estimates of $8.73 billion. Sprint's net loss widened to 46 cents a share, which was greater than the predicted 40-cent loss analysts predicted. Much of this greater than expected loss is believed to be based upon Sprint's ramping up of its infrastructure-upgrade plan and accelerated scrapping of the Nextel network. Sprint also increased its full year 2012 operating-income forecast to $4.5 billion to $4.6 billion, excluding certain items, up from about $3.9 billion.
Sprint's contract customers spent $63.38 on average a month last quarter, up $4.31 from a year earlier. Sprint noted that this was the greatest such year-over-year increase in the history of the U.S. wireless industry, and beat the average analyst projection of about $60.05. Most of this increase in average customer revenue appears based upon the addition of the iPhone, which Sprint started to offer during the fourth quarter of 2011, at which point the iPhone had been available though AT&T (T) for over four years and through Verizon (VZ) for three quarters.
Much of Sprint's weakness last summer and fall was based upon its contract with Apple to purchase $15.5 billion worth of iPhones over the first four years. The company was already saddled with significant debt and the need to continuously upgrade its network, and many believed that Sprint might not be able to sell a sufficient number of iPhones to satisfy its obligations.
A true fear of bankruptcy hit Sprint, but much of that has since been calmed as the company continues to decommission its Nextel network and sell iPhones in droves. Sprint had reported selling over three million iPhones coming into the second quarter, and reported 1.5 million iPhone activations during Q2. These continued positive sales results indicate that Sprint should be capable of meeting its obligation to Apple, and that the deal to get the smartphone was not a mistake. Sprint's average revenue per user increase appears to confirm it.
Further, Sprint indicated that its iPhone users are making fewer calls to care, service and/or repair their phones than are users of other smartphones, and that fewer iPhone users are returning the phone compared to other smartphones. This means that recent and continuing iPhone integration should reduce Sprint's cost per user while simultaneously increasing its revenue per user.
Sprint began selling the iPhone through the Virgin Mobile USA branded prepaid service on June 29, or just before the end of the second quarter. Sprint acquired Virgin Mobile USA in 2009 from billionaire Richard Branson's Virgin Group, at which point Virgin Mobile USA was already running on Sprint's network. The move should help Sprint sell more iPhones in the coming quarters, but since the company started selling the iPhone through Virgin on June 29, the market will not get any real information on such sales until Sprint reports its Q3 results in October.
Beyond the relationship Sprint has begun to forge with Apple, Sprint also has a good working relationship with Google (GOOG) and its Android OS, including being early adopters of Google Wallet and allowing for data only plans that integrate Google Voice, an Internet based service alternative. Sprint is also likely to benefit from the continued adoption of Android, including offering the Samsung Galaxy S3 and, starting next week, Google's own abovementioned Motorola Photon Q.
Furthermore, last year AT&T tried to buy T-Mobile USA, a subsidiary of Deutsche Telekom (DTEGY.PK), for $39 billion. The U.S. Department of Justice filed suit to prevent AT&T from acquiring T-Mobile, voicing concerns that the combination of the second and fourth ranked U.S. mobile service providers might stifle competition and raise consumer prices. Sprint, the number three telecom, was a vocal opponent to the deal, and could end up a beneficiary of its failure. Though AT&T could not acquire T-Mobile, Sprint may be able to merge with T-Mobile USA because of Sprint's more diminutive stature.
Additionally, the development of fiber optic networks have allowed both Verizon and AT&T to offer home-based cable and Internet services that compete with cable companies such as Comcast (CMCSA), Cablevision (CVC), Time Warner Cable (TWC) and DirecTV (DTV), and these cable companies may be interested in either acquiring Sprint or teaming up with the mobile operator in order to fight back against this new and sizable competition.
A common bundled service offered by cable and telephone companies is known as the triple play (including phone, cable TV and high-speed internet). There appears to be no real reason why AT&T and Verizon could not bundle a quadruple play that would include mobile device service into the already existing package. Cable providers without satellite networks may find it essential to partner up with independent mobile service providers in order to offer the same suite of services. Sprint and T-Mobile USA would be logical third-party providers for those cable companies and potential acquisition targets.
Sprint appears poised to continue to benefit from more Apple and Android related strength, as well as the technical strength that comes from its recent push into Wall Street friendly territory, with a price above five dollars per share. Moreover, several Wall Street analysts will likely revise their estimates and recommendations in the coming weeks, just like Bank of America did yesterday. The vast majority of analysts still have a hold recommendation on Sprint, and just a few more upgrades could compel the majority to follow suit. All of this indicates more tailwinds should be coming for Sprint shares.
Disclosure: I am long S.