Sprint Currently A Trade, Not An Investment

Aug.16.12 | About: Sprint Corporation (S)

It has been a very busy month for Sprint (NYSE:S). Since the company reported its earnings in July, there have been numerous announcements regarding debt issues, iPhone prices, and other matters. All of this has resulted in shares of Sprint trading wildly up and down. Today, I'll cover the latest round of news, then show why Sprint right now is a good trading instrument, and not an investment.

The iPhone saga:

Last week, I covered Sprint's move to drop the iPhone 4S price by $50 for each model (not including waiving the $36 activation fee). At the same time, I covered Fitch's report on Sprint, where it affirmed Sprint's debt rating and negative outlook.

Now, shortly thereafter, Apple (NASDAQ:AAPL) decided to match Sprint's offer by offering the discount at its retail stores. It appeared, and logically so, that both Sprint and Apple were trying to clear as much iPhone 4S inventory as possible, because the new model is expected out in a month or so. Sprint appears to be fine with taking a short term revenue hit on the cost of the phone, expecting to recoup that money over the life of the contract, especially if it is a new customer.

But Sprint didn't stop there. Just a week later, the deal got even better. Sprint announced it would give a $100 American Express Gift Card to new customers (note that key: new customers) to anyone purchasing a smartphone, including the reduced price iPhone. That effectively reduces the price of the one iPhone model to under $50. The above report also stated that Apple would match the $100 gift card at its stores.

Now, Sprint is desperately trying to sell its old iPhones, but it is interesting that the $100 Amex gift card is on any smartphone. They key here is that you have to be a new customer. Old customers looking to upgrade, like myself, are out of luck. So when Sprint reports Q3 in October, the "iPhone sales to new customers" percentage may be a bit misleading. If it's rather high, bulls will celebrate. But I'll ignore that number and wait for the Q4. Let's see how many iPhones Sprint sells to new customers when they aren't offering a $100 or $150 discount.

Sprint Debt Moves:

Sprint has announced a couple of moves regarding its debt since I last reported on the name.

First, Sprint announced an offering, and has since closed on, $1.5 billion of new debt. These notes are 8-year notes and carry an interest rate of 7%. As with past issues, Sprint said it would use the money to pay back existing debt, fund Clearwire (CLWR), upgrade the network, and other corporate matters.

Additionally, Sprint announced it would be retiring almost the same amount of Nextel debt. The company will retire about $473 million of the Nextel 6.875% notes that were due in 2013. Also, the company will pay back $1 billion of the Nextel 7.375% notes due in 2015.

Basically, these two moves essentially negate each other. With Sprint shutting down the old Nextel network, it is paying back that debt, and issuing new debt for Sprint. The financial impact on this move is rather small. It will result in a pre-tax savings of $1.25 million annually in interest costs. That's almost nothing when it comes to a company with tens of billions in annual revenues, and has no impact on a per share basis with 3 billion shares outstanding.

Technically, you could argue that this move is a net negative. With Sprint having nearly $7 billion in cash and short term investments as of the latest quarter, you might have liked to see them pay back the Nextel debt with that money, instead of issuing new debt. That basically extends the debt until 2020, meaning another number of years with a $105 million interest expense (pre-tax, based on the new issuance at 7% and $1.5 billion).

The Short Side:

Sprint has seen its shares double over the last few months. But I stated in my recent article that the name has also seen its fair share of quick declines, which has provided some nice moves to be short. Now, I provided a table of all the 20 cent moves from high to low the name made, and I've updated the table to show the recent moves, a few of which happened just in the past week. This is the start of my explanation as to why Sprint is currently a trade, not an investment.

Dates High Low Change
5/15 to 5/18 $2.54 $2.32 $0.22
5/29 to 6/4 $2.67 $2.44 $0.23
6/11 to 6/12 $3.08 $2.80 $0.28
6/25 (intra-day) $3.28 $3.05 $0.23
7/5 to 7/10 $3.48 $3.15 $0.33
7/19 to 7/25 $3.73 $3.31 $0.42
7/31 to 8/2 $4.60 $4.00 $0.60
8/9 to 8/10 $4.96 $4.71 $0.25
8/14 to 8/15 $5.10 $4.85 $0.25
8/15 to 8/16 $5.49 $5.05 $0.44
Click to enlarge

Even on Thursday, Sprint made a huge intra-day move.

The volatility has increased:

Sprint hasn't exactly been moving up quietly in recent months. The name has its fair share of sharp moves, in both directions.

I've put together a table showing Sprint's volume, average closing price, and average trading range to show what I mean. I used three decimals to be a little more precise. Also, I've provided a range percent, showing the average range divided by the average closing price in that period.

Period Volume Avg. Close Avg. Range Range %
1st Quarter 47 million $2.449 $0.104 4.26%
2nd Quarter 51 million $2.677 $0.123 4.60%
Q3: Pre-Earnings 45 million $3.421 $0.142 4.14%
Q3: Post-Earnings 101 million $4.604 $0.258 5.59%
Click to enlarge

It is interesting to note that even as Sprint's price has basically doubled, so has the volume. Even if you take out the day Sprint reported earnings, when it traded nearly 305 million shares, the post-earnings average is still 88 million shares, nearly double that of the pre-earnings period.

The range has also gotten wider, and by a significant amount, which would seem logical given the increased volume. Think about it this way as well. Since the earnings were reported, 7 of 16 trading days have seen trading ranges of 33 cents or more. That's quite a move each day when you consider this name trades for just over $5.

An example of why investors need to be careful here:

A quarter here or a quarter there doesn't seem like much to many, but on this low priced stock, it can be rather huge.

Consider the following example. You have two investors that each buy $5,000 worth of Sprint at 4 different price points, all on the way up as Sprint shares have rallied.

Investor 1 buys at $3.50 and every 50 cents above that, so $4.00, $4.50, and $5.00. Investor 2 buys at $3.75 and every 50 cents above that, so $4.25, $4.75, and $5.25.

How much does that $0.25 matter? Well, each investor has bought $20,000 worth of Sprint shares. But investor 1 has approximately 4,790 shares (we are ignoring commissions for simplicity) at an average price of $4.18. Investor 2 has just 4,515 shares at an average price of $4.43. That's an extra 275 shares, which isn't exactly nothing.

The lesson here is simple. Investor 1 bought on the first move upward, or waited until the stock made one of its 20 cent or more declines. Investor 2 waited to react, bought at much higher levels, and thus, is not in as good of a position.

Conclusion - Trading is the way to go:

Realistically, there is nothing "game-changing" about the main news that has involved Sprint over the last week. The debt deals are basically a wash, and while the iPhone discounts may stimulate a few sales here and there, the main focus, and future of Sprint for now, relies on the new iPhone, coming out next month perhaps.

Thus, Sprint has become a tremendous trading stock recently, seeing heavy volume and much wider trading ranges. In fact, I've freed up some of my own capital, and I may just start trading Sprint here - in both directions. But one thing is for sure. I won't be owning Sprint for very long, and lately that has been the way to go. I will remind everyone that short term trading can carry significant risks.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in S over the next 72 hours.

Additional disclosure: Author does not maintain a long-term position in Sprint (either long or short), but may initiate short-term long/short trades in Sprint dependent on market movement.