Sprint's Mountain Of Debt

Summary

• Sprint is experiencing debt problems that will continue to get worse.
• They also have a poor financial performance.
• Sprint is a risky investment because of their declining condition.

Introduction

Investors should be aware that Sprint's (NYSE: S) increasing debt and poor financial state signals a risky investment. Sprint has acquired an oppressive amount of debt that is a cause for concern. This is because they are also experiencing financial problems in many different areas. This will be demonstrated through an analysis of their balance sheet, financial ratios, cost of debt, revenue, net income, earnings per share, and stock valuation.

Mountain of Debt

If a company has a high amount of debt, they should have an adequate amount of equity. For example, in 2016, AT&T (NYSE: T) reported $114 billion of long-term debt and $124 billion of equity. However, this is not the case with Sprint. On their balance sheet for 2016, they reported approximately $30 billion in long-term debt and only $19 billion of equity. According to Reuters, Sprint's total debt-to-equity ratio is 196.43%, while the ratio for their industry is only 133.20%. This indicates that Sprint is too leveraged because they are heavily adding more debt than equity. A company that has a debt-to-equity ratio this high indicates a risky investment.

Sprint will have more debt coming because telecommunication companies will now have to report the expenses from operating leases. The Financial Accounting Standards Board established a new accounting rule in 2016 that requires leases to be included on a company's balance sheet. Before the rule was created, companies did not have to report the debt from these leases on their balance sheet. The new rule will take effect in 2019 for most companies. Therefore, approximately $17 billion more in debt from these leases will be added to Sprint's burden in the future. The graph below shows how much debt is expected in the near future. This is over $6 billion more in debt in just the next two years. Investors should realize that Sprint's debt will continue to increase.

The cash flow-to-debt ratio compares a company's annual operating cash flow to their total debt in order to determine if the company can cover their debt obligations with their incoming cash. Total debt is the sum of their current and long-term debt. The higher the ratio, the higher their ability to pay their debt. The table below shows Sprint's annual ratio for the last two years compared to their industry peers, Comcast (NASDAQ: CMCSA) and AT&T. While Comcast and AT&T have high ratios, Sprint's ratio is low. This is because Sprint had a very small amount of operating cash flows compared to their high total debt in the last two years. For example, in 2016, Sprint had less than $4 billion in operating cash flow with almost $34 billion in total debt. Another reason Sprint is a risky investment is because they do not generate enough cash flow to cover their large amount of debt.

Sprint
Year	Operating Cash Flows (Billion)	Total Debt (Billion)	Cash Flow-to-Debt Ratio
2016	3.9	33.96	11%
2015	2.45	33.83	7%
Comcast
2016	19.24	61.05	32%
2015	18.78	52.62	36%
AT&T
2016	39.34	123.51	32%
2015	35.88	126.16	28%

Click to enlarge

The cost of debt is the interest rate that a company pays on its borrowings. The weighted average cost of debt is the sum of the weight of each bond issue multiplied by its yield to maturity. The table below shows the calculation of Sprint's pre-tax cost of debt by using their outstanding bond issues from Morningstar. Sprint's cost of borrowing their debt is approximately 4.3%. After performing the same calculations for their competitors, Sprint actually has the higher cost of borrowing. For example, Comcast's cost of borrowing is approximately 3.6% and AT&T has a cost of approximately 3.7%.

Sprint
Bond Issues Outstanding (Million)	Price	Quote	YTM%	Market Value (Million)	Weight	W*YTM
3,000	108.60	108.60%	3.43	3,258	0.293523	1.006783
2,280	102.30	102.30%	5.52	2,332	0.210136	1.159953
1,500	107.10	107.10%	4.7	1,607	0.144734	0.680251
1,300	101.80	101.80%	3.13	1,323	0.119229	0.373187
1,000	109.00	109.00%	3.7	1,090	0.098201	0.363345
1,000	125.20	125.20%	5.26	1,252	0.112774	0.59319
200	118.70	118.70%	4.98	237	0.021388	0.106513
0.17	95.50	95.50%	12.29	0.16	1.42E-05	0.000174
MVD (Million)				11,100	WACD	4.28%

Click to enlarge

The interest coverage ratio is a measure of how well a company can pay their interest expenses on their outstanding debt. The lower the ratio, the harder it is for the company to finance their interest obligations. According to Reuters, Sprint's interest coverage ratio is .43, while their industry ratio is 187.06. Their ratio is extremely low compared to their industry average. This suggests that Sprint has a difficult time paying off their interest expenses.

To try to combat their massive debt burden, the company's top executives are promising a revival to turnaround Sprint's performance. They plan to do this by cutting costs. However, Bloomberg emphasizes that this would only cover around $13 billion of their financial needs. This would not be enough to get the company out of their financial hole.

Financial Performance

The graph above shows their revenue over the last three years compared to their competitors. Sprint's revenue has not shown any growth over this period. Instead, it has remained steady at around $8 billion since 2014. Also, their revenue is below the revenue of their competitors over this time period. In fact, the revenue of their competitors is high and shows growth, while Sprint's revenue has been without growth or improvement of any kind. The graph below shows Sprint's net income since 2011. These results show that they have actually had a net loss every quarter since 2011, which is an indicator that the company is in a very bad financial position. Their highest net loss occurred in 2015, reaching almost negative $2.5 billion.

The graph below shows Sprint's earnings per share compared with Comcast and AT&T over the last three years. Investors want a company that has a high earnings per share. Sprint does not meet that requirement because they have had negative earnings per share over this period. This follows the same negative trend that their net income showed. With the exception of two quarters for AT&T, Sprint's earnings per share has been below their competitors. Overall, Sprint has shown a very poor financial performance compared to their industry peers over the last few years.

Stock Valuation

Sprint's stock is currently undervalued. Their price-earnings ratio is -22.44. NASDAQ estimates that Sprint's P/E ratio for 2017 will reach as low as -44.44. Also, their estimate for their 2018 P/E ratio is -160. While an undervalued stock is attractive, a company that has a negative P/E ratio should be a big warning sign for investors. It signals that the company has negative earnings, which means that they can't make a profit. Therefore, a stock with a negative P/E ratio is a risky investment.

Conclusion

Sprint's debt burden is becoming a real problem. Their 2016 balance sheet reports approximately $11 billion more in long-term debt than equity. Their total debt-to-equity ratio is much higher than their industry average. They have trouble covering their interest obligations. Also, Sprint does not generate enough operating cash flow to pay their debt. Their revenue has not shown any signs of growth and is below the revenue of their competitors. In addition, their net income and earnings per share have been negative. Their stock shows a negative P/E ratio, which indicates negative earnings. Overall, investors should be aware that Sprint is a risky investment because of their increasing debt and poor financial performance.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.