Is This Telecom Underdog Turning a Corner?

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

Sprint (NYSE: S) is still in the midst of a turnaround, but it is progressing very strongly so it might be past the turn. The company is recovering nicely, but its focus is on building a great network and providing its customers with a service worth paying for. It is the long game, but it is most definitely the right one. Sprint was amazing when it was scraping the bottom of the chart, and it is still a promising investment now. Until it generates a profit though, it is still under the broad term of a turnaround company.

There is a lot to talk about with Sprint from the pending Clearwire deal to the far older Softbank deal. Those important administrative things aside, focusing on Network Vision is extremely interesting. Sprint seems like it is on the path to a fantastic network. It does sorely need it as people I know that use Sprint experience a lag in their internet speeds. Offering unlimited data has its drawbacks, but the current caps from rivals AT&T (NYSE: T) and Verizon (NYSE: VZ) are too low and expensive. I know the two major rivals are more conscientious of capital expenditures, while Sprint is pursuing them aggressively. However, Sprint is catching up which means it has more ground to cover.

Sprint Advancing Uphill

Getting Clearwire makes sense, and more spectrum is valuable even if it is the lower value bands. Spectrum is an extremely limited resource, and if it acceptable to make bold statements then there is not enough spectrum and there never will be. Barring some sort of unbelievable jump in technology and science spectrum will always be constrained. The goal will always be doing more with less. If that means using less air time for the data through a wider dispersal of towers or use of Wi-Fi, then so be it. Spectrum is data capacity on a budget, because every bit has to be stretched.

Sprint has a solid cash position after its deal with Softbank. It will aggressively use that cash to build out its network. Once the Clearwire deal is closed the company is likely to avoid further high-profile acquisitions. There are not really other key stats worth looking at right now. There are still losses related to the heavy upgrading so any metrics relying on profits are useless.

Sprint is rapidly approaching a critical growth point if the last earnings call is to be believed. A lot of the groundwork has been done, and there have been some early completions. For example the last earnings call said that 32 cities had LTE up and running, but another 114 were expected in the coming months. This is to be expected as bell curves are common even in large growth plans. Initial projects are launched, but as the expansion plan is solidified numerous parallel projects are launched. With delays to be expected completions will group around an average time to completion. The next earnings call should shed more light on these developments. The large scale approach of the network upgrading is something I really like. Constructing something from the ground up is expensive and time-consuming but you frequently come out with a better whole than you would if you incrementally upgraded bits and pieces over long periods of time.

Sizing Up the Competition

Both AT&T and Verizon have earnings reports coming out soon so I do not want to get too into future strategies until that information is available. For now, just consider the fundamentals of the company to find an alternative investment to the turnaround that Sprint is. Both AT&T and VZ have fantastic dividends with 5.40% at T and 4.90% at VZ. That is good for both stocks since I am not sure about how much upside is left in either.

Verizon is at the top of its 5-year range, and while more gains are feasible it is not always comforting to be on the frontier of a share price. Cash and debt are fine at Verizon. It is the revenue and earnings growth that really sets the stock apart from AT&T. The numbers may not look huge, but revenue is so high that 4% is substantial in an absolute sense.

AT&T's revenue appears to be breaking down, though it is not confirmed yet. A quarter or two will really flesh out the trend. Right now it is basically zero, and it remains to be seen if that deteriorates further. Year over year comparisons sometimes make it tricky to spot a trend, but it is the favorite over sequential growth. Verizon is the company that is on steady ground, but with either of these companies my position size would be tiny. Enough to make the dividend worth it while keeping risk as low as possible. The reason is that I prefer Sprint.

Final Thoughts

Sprint is below $6. If its rivals are any hint, then a successful turnaround will yield a much higher share price. Even assuming it becomes third best it will be closer to AT&T and Verizon than it is now. It is third best right now, but the goal is profitable and third best without a chasm between it and the seeming duopoly of T and VZ.

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