Sprint's (S) stock has run up significantly over this year. In the past three months, the stock has risen more than 86%. While investors have made a nice profit on the company, they should consider taking profits soon. There is a very good chance that the stock could fall back to $4.
It is no coincidence that the stock has performed so well. The reason for the run up was due to a report that showed Sprint was seeing its customer base finally grow. Sprint added more than 1 million subscribers last quarter. Sprint also saw 1.5 million iPhone activations, while its competitors such as AT&T (T) and Verizon (VZ) saw activations fall. It's possible that Sprint could be taking market share away from AT&T and Verizon. Sprint offers much more competitive plans such as unlimited data, which has attracted plenty of customers. While it's nice to see Sprint turning things around, the road ahead is still very long. Sprint is still expected to post a $1.65 loss this year and a $1.00 loss next year. So for this year and next, they are projected to lose nearly $8 billion. This is quite a significant amount considering that the company's market cap is only over $14 billion.
Sprint seems to have plenty of liquidity right now, but the issue is that the company is still highly leveraged. Sprint has more than $21 billion in debt. Its major maturities will start coming in 2014. So Sprint needs to be able to start generating cash flow or else it will be under pressure when its maturities begin to roll around.
While it's good to see Sprint adding customers, it's not surprising. Last year, Sprint's shares fell more than 20% after concerns of liquidity arose. JPMorgan (JPM) and Deutsche Bank (DB) downgraded the company after the shares fell.
While subscriber numbers will likely improve from here driven by the iPhone, we believe that as long as Sprint is burning cash and both it and ecosystem partners need additional capital, it will be tough for the stock to work.
- JPMorgan's Philip Cusick
We estimate that Sprint needs to raise $5B of debt during 2012-2013 to fund Network Vision, iPhone subsidies and debt maturities. In our view, this is a key concern for investors as Sprint's bonds are trading at 10-11%, which implies steep incremental borrowing costs. But, based on our read of Sprint's credit agreement, we believe it can actually borrow up to $4B of lower-cost secured debt, which we expect to happen in the next 3-6 months.
- Deutshe Bank's Brett Feldman
I believe that Sprint should be worth $4 and the stock can easily fall back to that level. At $4 a share, the company's market cap is $12 billion. Sprint made more than $560 million in free cash flow in 2011. While the company has doubled CapEx spending since 2009, it's still to be determined how much that will actually add to the bottom line. A $4 per share valuation is pretty generous based on future growth estimates. With the recent run up it seems that the market already believes that Sprint is going to experience a large turnaround. Investors might be better off staying away from Sprint for now. If the stock has priced in significant growth, then it's possible there is a large downside. The risk-reward at this price is not that appealing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.