Buy Sprint: The Turnaround Has Become More Visible

| About: Sprint Corporation (S)
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Shares of the third largest U.S.-based telecom operator in terms of subscribers, Sprint Nextel Corp (NYSE:S), have outperformed rivals AT&T (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) on a YTD basis. Since the start of the current financial year, the stock has more than doubled in value and is currently trading 12% off its new 52-week high of $5.49. Despite the company posting losses over the years, we recommended buying Sprint because of a possible turnaround. Since our last look at the stock, it has gained considerable value, further confirming our previous stance.

Recently, through a press release, the company announced that the Federal Emergency Management Agency (FEMA) has chosen to upgrade its push to talk devices to Sprint Direct Connect. This is a good development for the company, especially because it is trying to wind down its Nextel Network by the middle of next year. In the second quarter, the company had a total of four million more customers than the same quarter of the previous year, and more importantly, over 50% of customers that left its Nextel network were retained by the company on its core Sprint network. And with Sprint Direct Connect, the company will be able to cover triple the square miles of the Nextel Network.

The company has also recently introduced its 4G LTE network to four more cities. Even though its rivals Verizon and AT&T have a much greater presence, with Verizon offering 4G services in over 300 markets, and AT&T in over 40 markets, we believe the company is taking a step in the right direction. This is all part of the company's Network Vision Program, which we believe is a good move towards competing with its bigger rivals. Through this program, the company will continue to install new equipment, which will consolidate spectrum bands on a single base station, providing it the benefits of energy efficiency, better coverage, and call quality, among others. The Network Vision Program is expected to bring the company a financial benefit of approximately $11 billion over a period of seven years, which will help in its turnaround.

In recent news, the credit rating agency Fitch affirmed the company s debt rating at B+. The agency has taken note of the fact that the company has improved churn and shown ARPU growth in the quarter recently ended, as well as raised its full year OIBDA guidance; perhaps that has reflected in the agency's recent affirmation.

The company has consistently grown its revenues over the last few years, and according to the latest quarterly results posted, it improved its quarterly revenues by over 6%. However, despite this growth in revenues, the company has not yet been able to bring a turnaround in its bottom line, largely due to its Nextel Network. But we believe that through its Network Vision Program, as well as the shutdown of the Nextel network, which is expected by next year, the company will realize significant financial benefits as well as cost savings.

Getting to the phase of generating profits is going to take quite some effort and investment, which may put further pressure on the company, but it has sufficient cash on its balance sheet ($6.4 billion) as well as improving operating cash flows to withstand those pressures.

In our previous report, we mentioned various reasons that led us to believe in a Sprint turnaround, a brief summary of which follows:

  • Strong iPhone activations (1.5 million in 2Q2012).
  • Through Virgin Mobile, the company can tap into the prepaid iPhone arena, which will fuel its earnings going forward.
  • Sprint is gaining strong traction with its HTC EVO, LG, and Samsung products. Samsung smartphone sales have outpaced iPhone sales recently, and this is a positive for the company, as it has significant exposure to Samsung products.

The stock is trading at 0.4 times its sales, much lower than the industry's P/S of 1.3x, as well as AT&T's 1.7x. Moreover, S is currently trading at an EV/EBITDA of 4.2x, which is also at a significant discount to AT&T's multiple of almost 8x. We believe the stock is currently undervalued based on the above multiples.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Telecom Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.