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Sprint Is Primed for a Big Rebound

July 20, 2012 | About:
Sprint (S) is one of the largest telecommunication providers in the U.S. The company operates mainly in two categories: wire line and wireless segments. Sprint has a presence in all the 50 states of U.S., Puerto Rico and U.S. Virgin Islands. It has a large all digital global network as well as wireless networks.

Sprint has over 56 million consumers and the subscriber number is on the rise. In June 2012, Sprint announced that it was going to expand its Ethernet access to provide better solutions to business and reduce costs. Sprint is also planning to expand these services to 143 domestic markets and 38 international markets by the end of 2012.

Sprint recently announced a partnership with Computer Sciences Corporation (CSC), to provide cloud computer infrastructure. The services will include, cloud computing, managed hosting and collocation services and cloud-based email. Sprint plans to launch the cloud services in late 2012. The launch of cloud services will help Sprint to increase its already strong portfolio. Sprint values this collaboration with CSC highly, as this venture will bring substantial benefits to current customers.

Sprint just launched Long Term Evolution [LTE] services, starting from July 15, 2012. The company wants to tackle the competition in the 4G network by introducing these services. Its larger competitors, AT&T (T) and Verizon (VZ), have already increased the data transmission speeds in their 4G networks. Sprint has already been selling LTE phones to promote its new high-speed data infrastructure.

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Source: Finviz.com

Stock Performance

Over the last nine months, the stock has been trading between $2 and $3. It was mid-June when the stock again breached the $3 dollars resistance level and went above $3.5 at the end of June. The 52-week range for Sprint is $2.10 to $5.41. Sprint has a market cap of $10 billion. The stock is highly liquid with an average daily trading volume of 49.77 million shares. Beta for the stock is 1.06. Even after the recent run, the stock is still trading significantly lower than the 52-week high. High-debt telecom stocks tend to be highly cyclical in nature. I expect Sprint to go up as the global economy recovers.

Ratio Analysis

Sprint has negative earnings at the moment, which makes its P/E ratio meaningless. The current EPS is at $-1.11. The price to sales ratio for Sprint is .33 and price to book ratio stands at 1.05. The stock is currently trading at about its book value, which is rare for an established telecom company. The P/C ratio is 1.47. The liquidity position of the company is fairly strong. The current and quick ratios are 1.90 and 1.79, respectively. Net profit margin for the last year was -8.58%. For the first quarter of the year 2012, it was -9.88%. Operating margin for the company is also negative for the first quarter of 2012 at -2.92%. Return on average assets and return on equity also paint a gloomy picture; both of these numbers are negative at -6.92% and -31.44%.

Financial Performance

Sprint sales for the previous year were $31.4 billion, but the firm again failed to make a profit, and incurred a loss of $3.3 billion. Sprint has not been able to make a profit during the past four years. Earnings for the company have been negative. Revenues have been gradually increasing in the last three years, but the gross and operating margins have been declining. This indicates that the firm incurs heavy operating expenses. Sprint has more debt than its market cap, and it bears a lot of debt servicing costs. The debt to equity ratio of 2.10 is higher than the industry average of .76. The firm has a high financial leverage of 4.78.

Competitor Analysis

It is no secret that the main competitors for Sprint are AT&T and Verizon Communications. Verizon is currently trading at the top of its 52-week range. Verizon has a market cap of $128 billion. P/E ratio of Verizon is 48.51, and the forward P/E is at 16.20. Verizon has an impressive EPS of $2.5.

AT&T has a market cap of over $200 billion, which makes it one of the largest companies in the world. AT&T stock is also trading near its 52-week high of $36. The P/E ratio for AT&T is 50.94, and current EPS is $0.69. AT&T has a forward P/E ratio of just above 13 and forward EPS estimate is $2.38.

Summary

The main strength of Sprint is its high-speed wireless network. Sprint lagged its peers in terms of services, but the new 4G network could be a huge success. I believe wireless is going to be the future of the communications industry. The sector is very dynamic, and Sprint has a well-established clientele in this sector. Thanks to the fresh infrastructure, Sprint has a new advantage in its wireless network.

The company is currently working on reducing operating expenses and increasing EBIT margins. Sprint also has a strong market position in smartphones as well; I expect sales in this department to go up. Compared to its peers, the current price makes Sprint a remarkably cheap buy. The stock has already started showing an upward trend in price, and I expect this trend to continue. The company is making efforts in terms of new partnerships and products. These partnerships and products will improve the revenues. Mr. Market is just getting bullish on Sprint, and there is an ample opportunity to make profits for interested investors. The past profit numbers may deter some investors, but future prospects for the company look tidy. While the risks are inherent, the current price offers a nifty entry point.

About the author:

ogulsev
Efsinvestment.com website offers simple do-it-yourself type of investment ideas. You can download excel files that can easily calculate the Fair Value of a stock, along with O-Metrix score and Margin of Safety.

Investment philosophy is to first determine the maximum loss, and invest accordingly. Like many value investors, we prefer to invest in stocks with the highest dividend yields, and highest EPS growth potentials. Telecommunication and energy stocks in emerging markets are among the favorites.

Based on extensive quantitative analysis, in any market, going short is risky. Statistical analysis shows that technical indicators work only if they are strong enough to convince the majority of the investors. Do not buy a stock at the top, do not sell a stock at the dip.

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Rating: 3.4/5 (9 votes)

Comments

ogulsev
Ogulsev - 2 years ago
Feel free to discuss the Sprint's recent low-cost data plans.

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