This Telecom Stock Looks Like a Decent Play

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

The third largest US telecom carrier in terms of subscriber base, Sprint (NYSE: S),, survived difficult times for years. Despite the presence of the two big national players Verizon (NYSE: VZ) and AT&T, the company managed to scrape through its dismal phase. However, things started taking a good turn from Q4 2011, when the carrier got Apple’s iPhone on board. The iPhone sales acted as a savior for the telecom company, as it was feared to go bankrupt. This year the company has an even better deal as Japan’s Softbank has plans to combine with Sprint. This would really help the carrier, which is in deep need of cash to accelerate its Network Vision. The carrier’s shareholders would receive $12.1 billion and the company would be blessed with a cash infusion of $8 billion as per the deal.

Updates of the recent quarter
The company reported a quarterly wireless service revenue of $7.3 billion, an increase of around 6% compared to the same quarter a year ago. Sprint’s wireless service revenue witnessed a growth of 14%, and this was primarily driven by the increasing subscriber base and postpaid ARPU, which increased by $3.01.

However, as the company has been heavily investing in its Network Vision and working towards the Nextel platform shutdown, its related costs put Sprint into the red as it posted a net loss of $767 million. The carrier is in the second phase of the Network Vision, which involves a huge amount of investment. The company’s capital expenditure was as high as $1.49 billion in the quarter. However, this wasn’t a surprise.

In the third quarter, the telecom operator was focused on recapturing its Nextel customers and building its Network Vision. The company had a brilliant Nextel subscriber recapture rate of 59%, which was higher than expected. In fact, Sprint’s increase in its postpaid subscriber base, which witnessed a net addition of 410,000 in the quarter, was attributable to the Nextel recapture.

Another priority was the deployment of Network Vision, which seems to be very impressive. The 4G LTE has been launched in 32 cities and is expected to spread in another 115 cities in the next few months. The company also has an attractive lineup of 4G devices. It launched the Motorola PHOTON™ Q 4G LTE, the Samsung Galaxy Victory™ 4G LTE, and the iPhone 5 in the third quarter. The company sold 1.5 million iPhones in the quarter, out of which 40% were sold to new customers.

The increased capital investment elevated costs, and this resulted in a disappointing bottom-line. However these costs will reduce from 2014 onwards. In addition, the cash infusion from the Softbank deal would be a boon to the wireless provider in the network deployment. The deal is going to help Sprint in a lot of ways.

The Softbank deal to strengthen Sprint’s competitive position
The deal comes as a relief to the debt-heavy company. With Softbank’s backing, Sprint will not have to further burden itself with additional debt to upgrade its network. Not only will the deal improve Sprint’s cash position for the Network Vision, but it will also arm the carrier to battle the bigger competitors of the industry.

Prior to the $3.1 billion cash infusion by Softbank, Sprint’s cash reserve fell to as low as $4 billion. The cash injection led the company to buy a majority stake in Clearwire (NASDAQ: CLWR), and this means access to the valued wireless spectrum. In fact, a major investor in Clearwire, Mount Kellet Capital Management, wants the company to sell its excess spectrum to Sprint as it fears that the latter would buy Clearwire at an extremely low price. The company board should prevent such a thing by selling chunks of wireless holdings that it doesn’t require. The wireless spectrum is essential for Sprint to build the 4G network and manage the shooting data demand. By increasing its stake in Clearwire and building the Network Vision, Sprint has made it very clear that the carrier is desperate to break the virtual duopoly of Verizon and AT&T.

Softbank is deep pocketed and can help finance Sprint in the network deployment, which would equip the carrier to combat Verizon and AT&T and gain market share. However, this will not happen immediately; it would take some years of continued effort that will lead to gradual growth and expansion. Verizon has had the first mover advantage in LTE. The lead US telecom player rules 66% of the US LTE market, with the LTE network spread over 400 markets. Even AT&T’s network deployment is near completion and the company is now enjoying the rising cash flow. Sprint understands that catching up with such a strong players isn’t an easy job, so it would have to compete on price and value to snatch market share.

The deal is extremely essential for Sprint to build the 4G network and match its offerings with the requirement of the subscribers. Mobile data traffic is rising at an unbelievable rate and the monthly global mobile data traffic is expected to cross 10 exabytes in 2016 as per the Cisco® Visual Networking Index forecast. The global mobile data traffic will rise 18-folds by 2016, according to their forecasts. Sprint is getting set to take advantage of this increasing demand by building the nationwide 4G network.

However some analysts are still doubtful about the success of the deal.

What’s the doubt all about?
First, the deal would have to undergo the regulatory screening. There are no reasons why the deal should be blocked. Sprint’s customer base is much smaller compared to Verizon’s or AT&T’s. The object of the deal is to uphold competition and fight the duopoly, rather than hurt competition. The deal would make Sprint a stronger contestant, creating a more competitive market and benefiting consumers.

But as I've said, the deal wouldn’t immediately make Sprint strong enough to fight the wireless titans. It would be a gradual process with increases in the subscriber base. The carrier offers the iPhone and other desired Android devices. With the 4G network in the future, Sprint will have all that it needs to compete with its stronger rivals, and this will finally lead to growth in market share.

My takeaway
Sprint is all set for a comeback. It has a lineup of attractive devices; the 4G Network Vision is making good progress; the Softbank deal is set to strengthen the company; and Sprint is making sure that there is no spectrum dearth by keeping a majority stake in spectrum king Clearwire. It’s time investors should take a look at this rewarding stock.

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