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Sprint And The Severe Market Overreaction, Part II
- In my previous article, I discussed why Sprint is a bargain risk-reward value going forward.
- Due to the outstanding response, I felt I should elaborate on Sprint as a long position.
- Sound management decisions, combined with access to SoftBank's deep pockets for the 600 MHz auction in 2016 are all good signs for the beleaguered telecommunications provider.
- Sprint has become a lotto ticket, and we'll explain why.
- The company is under a mountain of debt and free cash flow generation remains elusive.
- A buyout may be the only way investors get bailed out, but that's not much of an investment case, in our view.
- Sprint (S) has seen its share of tough times over the past several years.
- It will take a while to right the ship, but leadership seems to be on the right track.
- There are hidden gains in the steeply discounted prices that Sprint has recently brought to the market, which may well produce an upswing to current forecasts.
- Sprint recently introduced a new plan to attract customers and give a boost to its declining postpaid subscriber base.
- The carrier has also been lagging rivals Verizon and AT&T in LTE coverage and quality, but claims that most of its network upgrade is complete.
- Our price estimate for Sprint is about $6.50, which is significantly ahead of the current market price.
- Sprint entered the wireless service price wars in August with one of the more aggressive cuts we've seen in telecom.
- If Sprint's plan doesn't work, lower operating margins and revenue will result.
- With Sprint's high debt and unprofitable business, 2015 will be a crucial year, one that could result in significant stock losses.
- Evercore predicts that Sprint will need to raise substantial cash to fund operations and prepare for the 2016 spectrum auction.
- Domestic wireless pricing wars created by Sprint caused the company to lower adjusted EBITDA forecasts by a dramatic amount for the current fiscal year.
- Softbank relationship might help with the capital raise, but it won't reduce any dilutive impact.
- Company has opted to offer cheap individual and family plans along with unlimited data plans.
- Also focusing to build strong network with enhanced capacity and coverage.
- Company has managed to reduce its subscriber loss.
- Jeff Hallock is departing, and the "Framily" plan he oversaw was cut.
- Marcelo Claure has cut jobs, cut prices, and changed the marketing strategy.
- Previously, I didn't think Sprint's low price plans were going to drive risk-adjusted returns for the company.
- The departure of the Chief Marketing Officer Jeff Hallock and the end of Framily has changed my position.
- I believe Sprint offers the best value in wireless, but the company did a terrible job of educating consumers. The goat will fix that.
Consistent Strategic Policies Remain Key In Determining Sprint's Long-Term Performance
- Competition in the industry has adversely affected the company’s top and bottom-line numbers in the recent past.
- Top-line numbers and ARPU are likely to remain pressurized due to competitive pricing strategy opted by S.
- Cost cut efforts will positively affect bottom-line numbers in the future.
- Sprint reported a dismal second quarter across the board.
- Q2 EPS was negative $.19, missing estimates by $.13.
- Management cut guidance on EBITDA.
- The stock price was climbing leading up to earnings and then fell sharply from over $6/share to under $5/share.
- I predicted that the new plans weren’t going to provide risk adjusted returns, but I was nowhere near this bearish.
Sprint's Network Strategy Key To Sustainable Growth
- Sprint has embarked on an aggressive price campaign that will stem subscriber losses in the short term, but is limited by tight margins.
- Cost cutting measures have had an impact on investor confidence but will be short-lived.
- The key to Sprint’s success will be a clear network strategy that sells its differentiated 2.5 GHz network.
- Sprint officially announces the commencement of layoffs.
- Investors should continue avoiding the stock.
- Cost cuts were anticipated amid the wireless pricing war and investors were warned that the race to the bottom isn't a good investment thesis.
Sprint Focuses On Cutting Costs And Growing Organically As New CEO Makes Moves
- Offers new cheap plans for family and individuals.
- The company offers the best deal for its iPhone 6 subscribers.
- Network improvements remain core focus for company.
Sprint Takes The Right Approach To Survive Tough Competition Across Its Industry
- The company has opted for competitive pricing to address competition.
- Recent deals will help strengthen its subscriber base, but will likely adversely affect top-line and ARPU growth.
- The company needs to ramp up network upgradation efforts across covered markets to enhance customer experience.
Sprint: Claure Off To A Good Start, But The Road To Recovery Is Long And Uncertain
- Incoming CEO Claure made a great impression in his first month on the job.
- Investors like the unlimited iPhone deal, in an attempt to aggressively grow the customer base.
- The smaller scale and leverage remain key disadvantages in an industry that's very competitive.
Dec. 24, 2013, 1:33 PM
- The Nikkei reports SoftBank (SFTBF, SFTBY) is "in the final stages of talks" with Deutsche Telekom (DTEGY, DTEGF) regarding a deal in which 78%-owned Sprint (S -0.2%) would acquire Deutsche's 67% stake in T-Mobile USA (TMUS +1%). Sources add the deal could happen as soon as next spring, and could be worth more than ¥2T ($19.2B).
- A ¥2T price tag for Deutsche's T-Mobile USA stake would translate into a $28.7B valuation for the #4 U.S. mobile carrier. T-Mobile USA, whose shares have risen sharply thanks to Sprint M&A rumors, currently has a market cap of $25.5B.
- SoftBank CEO Masayoshi Son has reportedly been busy lining up financing for a T-Mobile USA bid, which is bound to be intensely scrutinized by regulators. Reuters has reported Dish (DISH +1.1%) is also thinking of bidding for T-Mobile, and wouldn't stand idly if Sprint made a move.
Dec. 20, 2013, 4:20 PM
- Bloomberg has joined the WSJ in reporting Sprint (S +6.7%) is trying to obtain financing for a T-Mobile USA (TMUS +4.7%) bid from six banks, and provides additional details.
- Bloomberg's sources indicate SoftBank (SFTBF) CEO Masayoshi Son has personally talked with banks about obtaining ~$20B in financing. His goal: To buy Deutsche Telekom's (DTEGY) 67% stake in T-Mobile in an all-cash deal.
- At the same time, Sprint's management is said to be "reluctant" to deal with integrating Sprint and T-Mobile's incompatible 3G networks; Sprint uses the EV-DO air interface, while T-Mobile uses W-CDMA/HSPA. But with SoftBank owning 78% of Sprint, their objections may be rendered moot.
- Also: With regulatory approval of a Sprint/T-Mobile deal far from certain, Son reportedly wants to avoid agreeing to a large breakup fee. AT&T had to pay a $7B breakup fee to T-Mobile two years ago.
- Separately, T-Mobile has scheduled a Jan. 8 CES event where it will reveal the fourth part of its "un-carrier" strategy. Part one involved the elimination of phone subsidies and contracts in favor of monthly phone installment plans; part two involved the launch of T-Mobile's Jump smartphone upgrade plans; and part three brought cheap global data roaming and international talk/text plans.
Dec. 20, 2013, 12:08 PM
- The WSJ reports at least six banks are working on financing proposals for a Sprint (S +3%) bid for T-Mobile USA (TMUS +0.7%). Sprint, whose shares jumped a week ago when the paper first reported the carrier is thinking of making an offer for its smaller rival, is now up 16% since the initial report arrived.
- Financing or not, close regulatory scrutiny of a proposed merger between the third and fourth-largest U.S. mobile carriers is a given. JPMorgan noted yesterday a Dish (DISH +1.6%) bid for T-Mobile (TMUS +0.7%), also reportedly being weighed, would have much less trouble being cleared by regulators.
Dec. 19, 2013, 2:21 PM
- SandRidge Energy (SD +2.6%) spikes after Leon Cooperman lists it as one of his five favorite stocks, citing the company's "fundamentally improving trend" the market has been slow to recognize; he thinks SD has the potential to double to ~$10.
- The hedge fund manager also likes Sprint (S +3.3%) based on the prospect of a potential consolidation with T-Mobile, the U.K.'s Monitise (MONIF +7.8%) as a play on mobile banking, a re-made SunEdison (SUNE +4.8%) which is spinning off its money-losing semiconductor business, and Brazilian healthcare provider Qualicorp (QUAIF).
Dec. 18, 2013, 4:06 PM
- Less than a week after rallying in response to a WSJ report that Sprint (S +2.3%) is considering a bid, T-Mobile USA (TMUS +2.2%) has moved higher on a Reuters report stating Dish (DISH +0.5%) is weighing a bid for the #4 U.S. carrier, and won't stand idly if Sprint makes an offer.
- Charlie Ergen, thwarted this year in his efforts to buy Sprint/Clearwire and still looking to make use of Dish's 4G spectrum, has repeatedly stated he's open to a merger with T-Mobile.
Dec. 18, 2013, 2:22 PM
- "The Committee sees the improvement in economic activity and labor market conditions ... as consistent with growing underlying strength in the broader economy," the FOMC says, adding that the decision to scale back QE by $10B per month is based on "the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions."
- Although the Committee says it will "likely reduce the pace of asset purchases in further measured steps [should] incoming information support [the] ongoing improvement in labor market conditions and inflation moving back toward [the] longer-run objective," the Fed notes that asset purchases are "not on a set course."
- FOMC also says it "anticipates .. that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%."
- Updated FOMC projections: 2014 PCE inflation now seen at 1.4-1.6% (from 1.3-1.8% in September); 2014 GDP now seen at 2.8-3.2% (from 2.9-3.1% in September); 2014 unemployment rate now seen at 6.3-6.6% (from 6.4-6.8% in September). Full release
- 10-year yield is at 2.91% versus 2.87% just prior to the announcement.
- Dow (DIA +0.9%), S&P (SPY +0.6%), and Nasdaq (QQQ) all staged brief rallies on the news but have since retraced a bit. Gold (GLD +0.3%) fell sharply initially but recovered.
- ETFs: TBT, TLT, TIP, TMV, SHY, IEF, TBF, PST, EDV, TTT, TMF, VTIP, TLH, IPE, ZROZ, SBND, IEI, SCHP, DLBS, TYO, LTPZ, DTYS, STPZ, STPP, VGLT, TIPZ, UST, BIL, SHV, STIP, PLW, GOVT, FLAT, UBT, TBX, TLO, VGSH, VGIT, RINF, GSY, DTYL, LBND, SCHR, SCHO, TYD, ITE, TYBS, TPS, TRSY, TENZ, DTUL, TDTT, TUZ, SST, INFL, DTUS, FIVZ, TBZ, DFVL, FINF, UINF, DLBL, DEFL, DFVS, TIPX, TDTF, TYNS, SINF
Dec. 17, 2013, 2:06 PM
- In what might be a sign of things to come, Sprint (S +3.2%) is partnering with Dish (DISH +2.4%) to offer 4G home broadband services in parts of Texas. The service, which relies on Sprint's spectrum, is expected to launch in Corpus Christi in mid-2014, and to eventually expand to other markets.
- Dish, which made a failed attempt earlier this year to buy Sprint and Clearwire, is still exploring options for putting its own 4G spectrum to use. Sprint has hinted it's open to a network-sharing deal with Dish.
- Meanwhile, Centerbridge Partners has backed out of a tentative $3.3B deal to buy bankrupt LightSquared's spectrum. That could pave the way for Dish, which has made a $2.2B bid for the spectrum (in spite of ongoing GPS interference concerns), to win out.
Dec. 13, 2013, 4:41 PM
- Sources tell the WSJ Sprint (S +4.3%) is "studying regulatory concerns" related to a T-Mobile USA (TMUS +8.2%) bid, and that SoftBank (SFTBF) founder/CEO Masayoshi Son is "driving" the effort. However, they caution Sprint hasn't yet decided whether to make a move.
- Deutsche Telekom (DTEGY), which retains a 67% stake in T-Mobile USA, is said to be "looking to possibly exit the U.S. market." Though Deutsche is currently prohibited from selling T-Mobile shares until 18 months have passed from the closing of the MetroPCS deal, it can sell earlier if it received an offer for the entire stake.
- Sprint and T-Mobile only have 53M postpaid subs between them, less than Verizon's 95M and AT&T's 72M. If they try to go through with a merger, they'll mention such figures to regulators early and often.
- But the FCC and DOJ, only two years removed from thwarting AT&T's bid for T-Mobile, haven't given any indication they're now comfortable seeing further consolidation among nationwide U.S. carriers.
- Previous: Sprint reportedly working on deal with T-Mobile
Dec. 13, 2013, 4:01 PM
- The WSJ reports Sprint (S +5%) could make a bid for T-Mobile USA (TMUS +7.8%) in 1H14. Both Sprint and T-Mobile shares have spiked in response.
- The FCC would doubtlessly give close scrutiny to a deal that would reduce the number of nationwide U.S. carriers to three from four. But Sprint majority owner SoftBank (SFTBF) hasn't been scared to make big bets.
- Both Sprint and T-Mobile's wireless subscriber bases are considerably smaller than Verizon and AT&T's, particularly with regards to corporate users. Sprint may be betting regulators will allow a deal to go through for this reason.
Dec. 12, 2013, 1:32 PM
- The FCC has reached a deal with major U.S. carriers (VZ, T, S, TMUS) to make it easier for consumers to unlock their phones. The deal will guarantee postpaid users can unlock their phones once their contracts end, and will reportedly also cover some prepaid phones.
- In addition, carriers will have to approve or deny unlocking requests within two business days, and (according to sources) will also have to notify consumers when their phones become eligible for unlocking.
- A big increase in the number of unlocked phones in use could results in higher customer churn, as users no longer find it necessary to buy a new phone and (if they want a subsidy) agree to a new contract to switch carriers. At the same time, it could lower phone subsidy expenses.
- Previous: FCC wants carriers to allow unlocking
Dec. 10, 2013, 6:05 PM
- By leveraging spectrum found in three different bands (including city-friendly 2.5GHz. spectrum acquired from Clearwire), Sprint's (S -0.1%) Spark 4G LTE service will offer download speeds of 50-60Mbps in the near-term and (with the help of carrier aggregation) possibly 150-180Mbps in two years, says CEO Dan Hesse at a UBS conference.
- Sprint is in the midst of rolling out Spark in a handful of major cities (service was just launched in Chicago), but Hesse promises much wider availability next year. He also admits Sprint's breakneck LTE buildout has caused some near-term service quality issues; Consumer Reports recently ranked Sprint dead last among U.S. mobile carriers in a customer service survey.
- Verizon, which continues to have a 4G coverage edge over rivals, is in the midst of tripling its 4G capacity in major markets.
- Separately, Sprint has priced its debt offering. The company is selling $2.5B worth of 2024 notes carrying a relatively steep interest rate of 7.125%.
Dec. 9, 2013, 11:31 AM
- Sprint (S +1.3%) plans to sell debt due in 2024 through a private offering. No offering size has yet been given. The #3 U.S. carrier says it will use the proceeds for "general corporate purposes, which may include, among other things, retirement or service requirements of outstanding debt and network expansion and modernization." (PR)
- Sprint already had $33.6B in debt at the end of Q3, to go with $10.7B in cash/investments. In July, 78% owner SoftBank promised Sprint would spend $16B in capex over the next two years, as it races to neutralize Verizon/AT&T's 4G coverage edge.
Dec. 6, 2013, 6:04 PM
- FCC chairman Tom Wheeler discloses a much-anticipated auction of broadcast TV spectrum to mobile carriers won't take place until mid-2015. Under prior chairman Julius Genachowski, the commission had set a June 2014 target date for auctioning the airwaves, which reside in the rural-friendly 600MHz. band.
- Sprint (S) and T-Mobile (TMUS), who badly need more low-frequency spectrum to expand their rural coverage, have been hoping the auction would happen sooner rather than later. Verizon (VZ) and AT&T (T), who own ~75% of all sub-1GHz. U.S. mobile spectrum, currently offer better rural coverage in many regions.
- Earlier this week, Wheeler hinted the FCC's auction rules will favor the likes of Sprint and T-Mobile, who have been calling for restrictions to be placed on how much spectrum Verizon and AT&T can purchase.
Dec. 5, 2013, 9:57 AM
- Sprint (S +2.9%) has been upgraded to Buy by Nomura.
- Open Text (OTEX +1.2%) has been upgraded to Neutral by Susquehanna.
- Lumos Networks (LMOS +3%) has been started at Buy by Canaccord.
- Mavenir Systems (MVNR +6%) has been started at Buy by Deutsche after posting its Q3 results.
- Arris (ARRS +5.7%) has been started at Buy by Brean.
- Tangoe (TNGO +3.6%) has been started at Buy by Roth.
- Cabot Microelectronics (CCMP +1.9%) has been started at Buy by Needham.
Dec. 3, 2013, 4:28 PM
- New FCC chairman Tom Wheeler: "Spectrum is finite ... A key goal of our spectrum-allocation efforts is ensuring that multiple carriers have access to airwaves needed to operate their networks."
- Wheeler also made note of an April DOJ filing calling on major upcoming FCC spectrum auctions (due in 2014, at the earliest) to be designed to guarantee smaller carriers get enough low-frequency airwaves (better for rural areas).
- The remarks have been praised by Sprint (S -1.8%) and T-Mobile USA (TMUS +1.9%), who have been calling for such rules themselves. Bigger rivals AT&T (T -0.2%) and Verizon (VZ +0.7%), who between them own ~75% of the country's low-frequency mobile spectrum, probably aren't as pleased.
- Sprint, which obtained a huge chunk of high-frequency (2.5GHz.) spectrum through the Clearwire deal, claims it would need 13-15 2.5GHz. cell sites to cover as much ground as one 700 MHz. site. T-Mobile is reportedly looking to buy unused 700MHz. spectrum from Verizon.
- AT&T is set to acquire high-frequency (1.7-2.1GHz.) spectrum through the Leap Wireless deal, but (no doubt to appease the FCC) plans to have Leap sell 700MHz. spectrum it recently acquired for $204M.
Dec. 3, 2013, 1:25 PM
- Sources tell Light Reading Sprint (S -1.4%), at SoftBank's (SFTBF) prodding, is preparing to move its HQ from Overland Park, KS (a Kansas City suburb) to California (no word on exactly where in the state).
- The site points out SoftBank has been "trying to move some Japanese executives to the U.S." since it bought a 78% stake in the #3 U.S. mobile carrier earlier this year, and that California is "a shorter commute" for SoftBank execs than Kansas.
- One Sprint employee talking to Light Reading says he hasn't heard of any plans for an HQ move, but does say SoftBank has taken far more of a hands-on approach with Sprint than was expected, and that there's "a lot of internal [and] operational auditing going on that's making employees nervous."
- SoftBank and Sprint have already announced plans to open a Silicon Valley office that would employ as many as 1K workers.
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