Sprint (NYSE:S) is a well-known pioneer and innovative player in the mobile industry. At the beginning of this century, the company was among the largest mobile service providers in the world. While, its current market cap is a fraction of its heyday valuation, Sprint still has one of the largest subscriber bases in the U.S.
Competitive 4G LTE unveiling
Sprint just launched its 4G LTE venture with Clearwire (NASDAQ:CLWR) on July 15 in five cities including Atlanta, Dallas, Houston, San Antonio and Kansas City. Sprint is already offering five LTE-supported devices including HTC EVO™ 4G LTE, LG Viper 4G LTE, Samsung Galaxy Nexus, Samsung Galaxy S III and iPhone. I think that was a smart move. Sprint lagged its peers in terms of smartphone services.
With the establishment of new 4G infrastructure, Sprint is catching up with Verizon (NYSE:VZ) and AT&T's (NYSE:T) LTE services. This backlog is due to Sprint's decision to opt WiMAX technology, which has higher engineering and infrastructure requirements. Verizon currently offers LTE services in 304 cities, two-thirds of the U.S. population. AT&T currently offers LTE service in 41 cities. Surely, Sprint's agreement with Apple (NASDAQ:AAPL) to offer iPhone to its customers was also effective in the management's decision to upgrade the network.
Sprint has 263,000 new postpaid accounts for Q1 of 2012, which is below the previous quarter's 539,000. AT&T and Verizon failed to acquire the same level of postpaid subscribers so far in the current year. Sprint recorded a total net addition of 1 million postpaid subscribers in a span of six years.
Pioneer provider of prepaid iPhones
Sprint will also offer iPhone through its Virgin Mobile USA subsidiary. iPhone prepaid plans will start at $30 per month, while unlimited data plans are for $50 per month. Sprint is currently the only mobile operator to continue unlimited data plans for iPhones, while AT&T and Verizon are both trying to phase out unlimited data. AT&T's cheapest iPhone offering starts at $60 per month with a two-year commitment, while Verizon's cheapest iPhone offering starts at $90 with only 1 GB of data included. Sprint's lead in iPhone sales could be a game changer for U.S. mobile carriers. Sprint will surely benefit from more Apple and Android related strength. I expect the company to report a record number of new subscribers in the next quarter, thanks to its aggressive price cuts.
An intuitively undervalued stock
Sprint's stock is undervalued at $3.37. According to its price-to-sales ratio, its stock is substantially undervalued compared to the industry average. Sprint has a market capitalization of about $10 billion compared to revenues of $34 billion. Sprint shares are now up by almost 55% percent since the start of this year, but are still down by 30% percent over the last 12 months. Investors are wary and also frustrated about Sprints temporary execution losses. I think the market is also ignoring the long-term impact of company's current strategies.
The wireless trend is still Sprint's main profit contributor. The smartphone market is also a strong profit center. Sprint sold more than 3 million iPhones in the first two quarters of 2012 alone. Investors who hold on to Sprint stocks are appreciative of the potential increase in profit margins. Thanks to the increasing free cash flow from LTE services and smartphone sales, I expect a stronger balance sheet this year.
Sprint's financial position is already strong with unrestricted cash of $8 billion and free cash flows of around $2 billion. Surely, Sprint is strongly leveraged company with a high debt-to-equity ratio of 200%. However, its debt in excess of $20 billion in the recent quarter is sufficiently covered with steady cash flows. The company's operating activities improved by net cash by 7% in Q1 2012. Sprint is highly liquid at quick ratio of 1.79, compared to the industry average of 1.19 and current ratio of 1.90 compared to the industry average of 1.29. Inventory turnover is fast at 27.73 times, and receivable turnover is at 11.09 times. Asset turnover is at 0.68 times compared to industry's 0.58.
The verdict: BUY and HOLD
Sprint is currently on an execution and transformational phase. Investing in Sprint, rather than the other direct competitors seems counterintuitive for conventional investors. In substance, it is not so irrational to hold Sprint stocks now for long-term gains in future. Sprint seems to be paving the way for a more profitable and stable future for its stockholders and consumers.
Surely, Sprint is a risk-taking company with a promising and dynamic financial outlook. The operational leverage of Sprint is unheard of in the mobile industry. The real challenge for Sprint can arise from changes in technology, which needs to be replaced on a continuous basis. All other signs point to a healthy profit in the future at current prices. I would suggest a buy/hold strategy for this stock. Even after the 55% run this year, the current price offers a compelling entry point.
About the author:
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.