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Sprint May Be A Great Buy At Current Evaluations

|Includes: Sprint Corporation (S)

Is Sprint a Good Buy At Current Evaluations?

Sprint stock has taken a beating in recent weeks. The plans to merge with T-Mobile were scrapped and investors did the same to the stock. The stock dropped 18.96 % on the 6th of August. Since that drop the stock has continued to lose another 6.10 %. The stock has not seen lows like this since January of 2013 when it hit a low of $5.53, that doesn't even match the low of $5.39 that the stock hit on August 19, 2014 on the bad news. To say the least it has not been a positive time to be an owner of Sprint. My question arises from this recent thrashing of the stock. Does the current drop make it a good time to buy Sprint?

Market Cap and Revenue

The beating of the stock price has brought the market cap down to 22.5 billion. The revenue from the past 4 quarters was 34.55 billion. This leaves the price to sales ratio at .65. A very low price/sales ratio compared to the industry.

Company

Market Cap

Sales

Price/Sales

       

Sprint

22,252,579,358

$ 34,555,000,000.00

0.65

       

T-Mobile

24,602,414,498

$ 27,575,000,000.00

0.89

       

Verizon

206,764,178,794

$ 123,645,000,000.00

1.67

       

AT&T

181,354,420,000

$ 130,372,000,000.00

1.39

I did some basic ratio analysis to compare the stock price of Sprint using the price/sales ratios of its competitors.

Company

Revenue per Share

Price/Sales

Stock Price

       

Sprint/T-Mobile

8.758

0.892

7.81

       

Sprint/Verizon

8.758

1.672

14.65

       

Sprint/AT&T

8.758

1.391

12.18

If we take the revenue per share of Sprint and times it by the price/sales ratio of the competitors we come to the equivalent stock price. As the range shows the price should be anywhere from $7.81-14.65 when compared on an equal price/sales ratio. We can even go on to say that we think a company should be worth at least as much as its annual revenue in a year. If we do the following to Sprint we get the following:

Company

Share Outstanding

Sales

Equalizer

Stock Price

Sprint

3,945,492,794

34,555,000,000.00

34,555,000,000

8.76

The annual revenues of 34.55 billion leave us with a stock price of $8.76. A 55.29% increase of what it currently is valued at.

Now of course this is not to say that the stock price should be just that. There may be many factors or reasons as to why the price/sales ratio of Sprint is below its competitors. Whether a stock should be valued at a minimum of its yearly revenues is also another debate that one could have. It is an interesting note that the S&P as a whole trades at a 1.71 price/sales ratio. There are obviously other factors to take into effect and even other ratios that we could run to evaluate the stock price. This is just one that I think should be considered when evaluating the company and whether it is undervalued.

Spectrum Evaluation

Another consideration that I looked at and found interesting in evaluating whether or not Sprint is a good speculative buy due to being undervalued is the value of the licenses or spectrum that the company has. Sprint as of its most recent quarter, reported on June 30, 2014, the company had a value of 35.829 billion worth of spectrum on its books. This is well above the current market cap of 22.503 billion of Sprint. If we were to value the stock price at just the value of the spectrum alone the price would be $9.08 per share. I do not believe the company could sell all of it's spectrum for that price, it would get discounted in the market. If we look at the current market cap of Sprint and set the value of the spectrum equal to the market cap the spectrum would be sold at 62.81% of its value. A 37.19% discount seems like more than a reasonable discount on the sale of its spectrum.

In comparison with the other competitors in the market we see that Sprint has a large amount of spectrum as compared to its value.

Company

Spectrum Value

Market Cap

Spectrum per Market Cap

       

Sprint

$ 35,829,000,000.00

22,252,579,358

1.592187708

       

T-Mobile

$ 21,828,000,000.00

24,602,414,498

0.917825828

       

Verizon

$ 75,527,000,000.00

206,764,178,794

0.374034914

       

AT&T

$ 59,655,000,000.00

181,354,420,000

0.332525084

Sprint is the only company in the list that has a spectrum value above that of its market cap, thus pointing to the potential undervaluation of Sprint.

Future Outlook

Sprint has started the price wars against the other wireless companies. Sprint has been losing subscribers since 2007 and is looking to reverse that trend. The price cutting will hurt the profit margin and may even hurt the bottom line in the short term. I think that in the long term the company will benefit from the current pricing strategy. It is not the point of this article to compare the pricing of the plans offered by the wireless carriers but it is enough to say that they have become very competitive. Sprint has reduced prices to the point that other wireless carriers have dropped prices as well. The deep pockets of Softbank should allow the company to sustain losses in the near term if that is the case.

The company has already prepared for the price war that it is entering. They have been reducing costs which will enable them to offer the lower prices without suffering from larger losses. The new CEO has said that Sprint will be more lean. The hire of CEO Marcelo Claure also appears to be a great option for the direction of the company, someone who is dubbed a "street fighter" by Mr. Son.

Conclusion

Sprint has seen a large decline in its stock price in recent weeks. Coming off the news that they will not try and pursue purchasing T-Mobile, the stock has hit 52 weeks lows. The company is looking to turn its decreasing subscriber base around. It is beginning a new stage as a company. They wanted to make an acquisition to compete and the option was denied. They are starting strategy number 2 which is to disrupt the wireless market with a pricing war. Their pricing has already had ripple effects as other companies have begun to lower their prices as well. The question going forward is will Sprint be successful with the new strategy? The other question that I pose right now is whether Sprint is a good buy with the recent drop in its stock price? Let each decide for him/herself, I just wanted to share some thoughts on the matter.