Fresh Off Acquisition Rumors, is This Telecom Company Worth Buying?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sprint Nextel Corporation (NYSE: S) was up over 15% on news that Japan’s third largest mobile carrier, Softbank Corp, was negotiating a deal to buy a majority stake of the company. The Reuters report states that Softbank will invest over $12.8 billion and comes just when Sprint was running out of options. However, is the investment from Softbank a buy signal, or is the pop in the stock a chance to sell?

Softbank released a statement to say that everything was still speculation and that their company was not confirming the announcement. Sprint is expected to grow revenue modestly over the next couple years, but is still trying to facilitate the build out of its LTE and 4G networks. With these initiatives the company hopes to slow the bleeding of subscribers, with Per share operating losses are expected to narrow from $1.42 in 2012 to $0.61 in 2013.

At the end of June, Sprint was the third largest U.S. carrier, behind the market leaders AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). See our thoughts on whether you should buy treasuries or one of these telecoms. Although there are four major national major wireless carriers—AT&T, Sprint, Verizon and T-Mobile—each have their own respective advantages, Verizon has been outpacing AT&T in terms of postpaid subscriber additions, but the real battle remains for spectrum. Verizon recently purchased spectrum from cable companies, while AT&T purchased some from QUALCOMM (NASDAQ: QCOM). AT&T abandoned its acquisition of T-Mobile, the subsidiary of Deutsche Telekom AG (PINK:DTEGY), and as a result we believe that Verizon now has a distinct advantage over AT&T in the spectrum battle—see which is a better investment: AT&T vs. Verizon.

Deutsche and T-Mobile are trying to differentiate themselves in the U.S. As Verizon and AT&T are charging more for handsets, AT&T is increasing pricing plans and Verizon is changing its plans, while T-Mobile is rehabbing LTE network to better position itself in the smartphone market. However, T-Mobile parent Deutsche is seeing risk in the German mobile market as flat rate plans are lowering mobile average revenue per user. Deutsche has already seen this happen in Austria, Denmark and France.

Sprint has been in turnaround mode for around three years now, the upcoming closure of the Nextel network in mid-2013 will make the battle for subscriber retention even greater and the continued turnaround even harder. The company posted 2Q results of negative net additions. In addition, while Sprint has finally got the iPhone, offering this iconic device cuts both ways as handset subsidies paid to Apple hurt margins. 
Sprint’s Network Vision network upgrade plan will enable it to move to next-generation LTE service, the industry standard 4G wireless data service. However, the cash drain over the next couple of years could preclude other investment options.

Sprint’s valuation metrics are favorable in relation to peers, but not by historical standards. We think that current operational challenges, combined with the risks inherent in the company’s network upgrade and Clearwire investment, warrant caution. The company’s stock price below $5 per share also leads to extreme volatility and may limit investor interest. Sprint’s relationship with Clearwire Corporation (NASDAQ: CLWR) continues to be a drag on the company. Sprint is making moves away from Clearwire, but is still on the hook for continued payments in addition to its continually depreciating interest in the company.

Sprint calls David Einhorn of Greenlight Capital its biggest fund owner. Einhorn has been a long-time supporter of Sprint and had 3.7% of Greenlight’s 2Q 13F portfolio invested in Sprint. Year to date Sprint is up almost 140%, but what is compelling about Sprint is valuation. The company trades at a 0.5 P/S ratio, while Verizon trades at 1.2x and AT&T at 1.7x. However, we believe the company still faces significant headwinds and is not cheap by historical standards. The company faces risks with executing its network upgrade and managing its Clearwire investment.


This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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