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Sprint’s investment plans make it a stock to watch

By Staff Correspondent |

The fourth-largest mobile network operator in the country, Sprint Corp (S), hit an all-time low of $4.81 on Wednesday, as markets remained concerned that 5G handsets will account for a marginal fraction of all phones in 2021. Sprint, which was trading between $4.81 and $9.22 for the past 52 weeks, was the worst performing stock among the top four telecom giants. While Sprint lost 41.96% of its value last year, AT&T (T) lost 14.27%, T-Mobile (TMUS) fell 6.06% and Verizon (VZ) slipped 2.32%.

Though Sprint has been trading in green from May to September last year, the stock lost its rally after the ending of merger talks with T-Mobile. SoftBank, a Japanese company with a majority stake in Sprint, remained concerned on combined business’s ownership structure, thereby calling off the negotiations.

In mid-October 2017, independent research firm MoffettNathanson LLC had predicted that if the deal does not go through, then T-Mobile’s stock will initially decline to $54 a share and Sprint could plunge below $3. Sprint’s fall didn’t matter much to SoftBank, which had already made a profit from the investment after the telecom major initiated many cost-cutting measures.

Sprint stock at watch list
Picture Courtesy: Sprint

Eighteen out of the 30 analysts covering the stock have approved a Hold rating, while five recommend an Underperform. Four analysts suggest a Sell rating.

When looking at the growth estimates, analysts are expecting a 14.30% growth in the current quarter and 676.70% jump in the current year. However, the long-term outlook is not encouraging with an expected dip of 102.90% next year. In another five years, shares are expected to see a modest 5% growth.

Most sell-side analyst firms are slowly shifting their recommendation from Hold to Underperform, though a majority of them are waiting for upbeat results or new price-discounts from the company. Sprint’s plan to invest heavily in capital expenditure too has made analyst firms to cling to the stock.

Looking on to Sprint’s results

In the most recent earnings, Sprint posted better-than-expected EPS driven by tax reform benefits. The company was able to add more postpaid phone customers for 10 successive quarters and boosted prepaid customers for four subsequent quarters, thanks to its continued focus on the cost structure. The company improved its cost structure after progressing on its multi-year plan. However, this did not stop Sprint from raising its full-year 2017 operating income guidance, helped by cost-cutting measures.

The company had more cash and cash equivalents at the end of the nine months period, thanks to the cash provided by operating and investing activities. However, Sprint was unable to invest excess cash in stocks and bonds, after looking at a 96.8% plunge in the short-term investments.

Though Sprint has been trading in green from May to September last year, the stock lost its rally after the ending of merger talks with T-Mobile.

During this period, Sprint was able to pay its creditors a tranche of the money owed, as can be seen from the 3.2% decline in accounts payable. The company had narrowed the losses derived from paying more dividends and earlier net losses, leading to an 85.3% dip in accumulated deficit. A lower accumulated deficit has a positive effect on the business, and the company is thereby distancing itself from a bankruptcy.

Sprint has the ability to pay back its liabilities with its assets with a current ratio of 0.92 and has been aggressively financing its growth with debt, which can be seen from its debt/equity ratio of 140.13.

Industry focus

The carriers are expected to face sales fluctuations, forcing companies to reassess their capital-spending decisions.

More product-sharing deals are on cards between cable TV, satellite, and telecom operators. The vicious price competition has intensified due to technological upgrades and breakthroughs. Also, new products and services are coming within a short time frame, thus cutting down on product life-cycle and upgrade-cycle. The telecom players are surviving by offering bundled services to keep their position in the space.

The market is undergoing a transformation with regards to 5G trials and its deployment as wireless companies are predicted to improve their networks and offer expanded services. Outlook seems positive for the wireless and broadband players, which will be driven by increased satellites coverage and cloud computing technology.

Sprint will be able to increase its average revenue per user if it succeeds in aggressively pricing its services, besides extending its list of subscribers. Apart from this, Sprint doubling down on investing in capital expenditure this year is also welcome news. Holding this stock till any further updates on its direction would not be a bad decision.

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