Shares of phone-carrier Sprint (S) have rallied after CEO Dan Hesse spoke at a Goldman Sachs (GS) conference. Hesse claimed the U.S. mobile carrier industry is ripe for massive consolidation and that Sprint will be a player in M&A action. He also stated the company will consider spectrum purchases, boosting the share price of spectrum owner Clearwire (CLWR). Hesse also mentioned that the company has doubled it recapture rates of Nextel customers, as it works to eliminate the legacy Nextel network.
Shares of the firm have risen considerably so far year-to-date, as it appears the company's gamble on the iPhone (AAPL) was well worth the investment. There was a very reasonable chance Sprint wouldn't survive if it couldn't move enough units; however, it has done a fantastic job differentiating its iPhone offering via unlimited data plans. We think retention rates will improve as customers gobble up the iPhone 5 and achieve meaningful data cost savings compared to AT&T (T) and Verizon (VZ).
Still, we think all of the major carriers will benefit from the iPhone 5 and the discounted iPhone 4S. We think smaller regional carriers like Metro PCS (PCS), U.S. Cellular (USM), and Leap Wireless (LEAP) will struggle to maintain market share. The cohort simply won't be able to compete with its deep-pocketed competition, especially if the major players (Sprint, Verizon, AT&T, and T-Mobil) cut prices and spend billions of dollars on marketing to gain market share. However, we think currently-high prices, muted competition, and increased overall industry profit is a more likely outcome.
Even though we mentioned previously here that Sprint's shares could double (see trajectory of fair value table in the article)--and they have--shares are fairly valued. In fact, we're not crazy about the total return characteristics of any name in the mobile carrier space at this time, though we think Verizon has an attractive dividend-growth profile (click here for our criteria on that). Still, we aren't looking to add any of the firms to our actively-managed portfolios at this time.
Additional disclosure: Some of the firms mentioned in this article are included in our actively-managed portfolios.