Add This Telecom Stock to Your Portfolio
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Wise investing requires understanding the past and anticipating the future on the basis of the past and the present. Though the company has been posting losses over the years, the future is looking greener and this should be enough to consider Sprint (NYSE: S) as a valuable addition to your portfolio. The third largest US telecom giant has outperformed the top two carriers Verizon (NYSE: VZ) and AT&T (NYSE: T) as the stock gained more than 120% since the beginning of the year and now with a possible turn around in sight, the stock is looking very attractive. So, what are the points that are suggesting a turnaround? Let’s dig deeper.
Doing away with the problem
Sprint has been consistently improving its top line over the past few years and despite this the company could not increase its bottom line mainly due to its Nextel network. However, the situation is about to change since the company will very soon do away completely with Nextel’s 2G network, probably by the middle of next year, and the company hopes the old Nextel customers to migrate smoothly to its new “Direct Connect” network. Recently Sprint announced that the Federal Emergency Management Agency (FEMA), previously a Nextel customer, has decided to upgrade its push to talk to Sprint Direct Connect. This is a huge step forward for Sprint towards accomplishing its target of winding down Nextel network. Sprint Direct Connect, i.e. the Sprint network, will also allow the telecom giant to triple its coverage as compared to Nextel network.
Strong planned progress
As a part of the Network Vision Program, Sprint is making substantial progress when it comes to expanding its 4G LTE network as recently the company added another 4 cities to its list. The company will start benefiting from its 4G LTE network after the up-gradation process is complete by end of 2013; till then it has ample cash ($6.8 billion) on its balance sheet to fund its operations. Though the total coverage of Sprint as of now is far below Verizon’s 300 markets and AT&T’s 40 markets, Sprint is making progress in the right direction. The company plans to improve its service quality by installing new equipment which will allow the company to bring together spectrum bands on a single base station and thus result in better call quality and coverage. The program will help Sprint to benefit from $11 billion over a span of seven years, therefore making it very crucial to Sprint’s successful turnaround. The company has already successfully reduced its churn rate from 1.72% to 1.69% while increasing the average ARPU to above $63 and now analysts and industry experts are expecting to see a positive earnings report from the company soon.
Cashing in on Apple
Another important part of Sprint’s growth and turnaround strategy is its association with Apple (NASDAQ: AAPL). Sprint also did well in comparison to Verizon and AT&T in terms of iPhone activations. While the top US telecom carrier booked a 16% drop in shipments and the second largest carrier booked 14% drop, Sprint reported a steady activation of 1.5 million units. Again, of Sprint’s total iPhone activations 40% were to new customers versus VZ’s 25% and AT&T’s 22%. Going forward, Sprint has committed to spending $15.5 billion on iPhones in the next four years and the management expects to earn back a huge portion of this money from the expected success of the latest iPhone. The management expects the demand for iPhones on Sprint’s network to be high because of its data plans which provides the best value to the customers and specially the iPhone users.
Possible merger
Apart from organic growth, rumors about Sprint’s inorganic growth have also been floating lately. There are high chances that the telecom giant might acquire T-Mobile and thus pose as a stronger competitor for the top two. However, analysts at Goldman Sachs believe that acquiring Metro PCS will be a better option since acquiring T-Mobile will have its own set of difficulties. Both Sprint and T-Mobile have huge debts to repay and a merger will only end up Sprint’s debt obligation hugely. In comparison to T-Mobile’s debt, Metro PCS’ debt is much smaller and acquiring PCS will help Sprint reach out to PCS’ young and urban prepaid customers. A possible merger with either of the targets will help Sprint in expanding its subscriber base, which at the moment is essential for Sprint.
Concluding thoughts
Sprint is looking fundamentally strong and also has got good upward potential. Strong product and service offerings are surely going to help the company report positive earnings sometime soon. On a comparative landscape the stock is looking undervalued and thus more tempting than peers. Sprint is trading at 0.4 times its sales and this is much lower than AT&T’s 1.7x and industry’s 1.3x. Since the start of the year the stock has more than doubled in value and this coupled with a strong turnaround possibility is making Sprint a must have.
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