Sprint Getting Cheaper

The Kelly Letter added Sprint (S) to its watch list earlier this month. We use the list to keep an eye on promising stocks so we can buy them more cheaply later. Sprint shares are down 9 percent since we began watching them, so patience has paid. Many people have argued that the drop in share price shows we’re barking up the wrong tree on this idea, but most of the best buys we’ve made began the same way. We love falling prices prior to buying because the companies we watch are of good quality and will recover.

Sprint is no exception. Almost everybody sees its recent negatives without noticing the progress it’s made in reinventing itself. From a peak market share of 25 percent, it fell to just 13 percent in 2009. Since then, though, it’s climbed up to 18 percent. It’s the third largest carrier in the United States, and it’s demonstrating positive signs in its customer service ratings, the broadening of its handset catalog, and its speedy network.

On the latter, CNET found at CES that on “the 4G side, Sprint beat T-Mobile by offering both the fastest data speeds and the most reliable network.” According to Auriga Securities analyst Chandan Sarkar, Sprint’s spectrum holdings alone are worth some $9B. Add on a base of 50 million subscribers that’s shown signs of growing, and the potential for a decent turnaround to share price targets of between $6 and $8 looks reasonable.

You’d never know it by looking at Sprint’s current figures, though. Earnings per share, for example, have declined from 87 cents five years ago to a current -$1.19. Bad, yes, but that’s why the stock is 80 percent cheaper today than it was five years ago, down from $21 to $4.27. Meanwhile, now that all the bad news is out, Sprint’s operating margin has dramatically improved from -72 percent three years ago to -3 percent now. It’s still not pretty, but it’s moving in the right direction. It’s better to buy when results are heading in the right direction than once they’ve already arrived at a good destination.

Sprint announced Tuesday a $10-per-month price hike on its monthly fee for smartphone users. Beginning Jan. 30, smartphone customers who activate new handsets will pay an extra $10 per month because, on average, they consume 10 times more data than customers with simpler handsets. The change will help Sprint’s margins, and the new $80 monthly rate for Sprint’s almost unlimited data plan still comes in cheaper than its rivals.

With much of the downside risk looking priced into the stock, Sprint could well deliver 50-percent gains or better for those who buy it at the low end of its one-year range between $3.50 and $5. It’s currently in the middle of that range, but nosing lower into territory that I think will warrant buying soon.

While we’re just watching now, we’ll eventually place a hard order to pick up shares of this turnaround story on the cheap.

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5 Comments

  1. James
    Posted January 22, 2011 at 5:18 am | Permalink

    Yes Sprint is cheap and getting cheaper for a reason. It is a company caught in between the big boys (AT&T, Verizon) and the smaller players (T-Mobile, MetroPCS). I see smaller carriers such as MetroPCS and PagePlus with their $40-$50 per month unlimited everything plans cannabalizing the low end smart phone market that would go to Sprint leaving them no where to turn.

    • Posted January 22, 2011 at 10:27 am | Permalink

      That’s the prevailing view. Where I think it’s wrong is in assigning Sprint the middle zone between the bigs and smalls, as you’ve done, and concluding that it has nowhere to go.

      Sprint is the smallest of the big three, with the most room to grow and the most ability to grow because it’s the only one not affiliated with a major local phone company. Such independence makes it the partner of choice for cable companies and others looking to offer wireless services to customers. Thus, contrary to having nowhere to go it has upward to go into the turf of the “big boys” so that it becomes a bigger boy itself.

      If this thesis is correct, then Sprint’s maligned middle position is actually the sweet spot of the industry. It enjoys competitive advantages over its smaller brethren but has more room to grow than its bigger peers.

  2. Dale
    Posted January 28, 2011 at 12:24 pm | Permalink

    Is sprint still a player in Clear? And if so is this an advantage over the competition
    Where they could offer wifi in the service areas ?

    • Posted January 30, 2011 at 6:54 pm | Permalink

      It’s working with Clearwire to make a next-generation network, but most analysts think it would have been better for Sprint to build it on its own. About the joint venture, Morningstar wrote last month: “The firm’s first step in this direction — dubbed ‘Network Vision’ — is encouraging, as it should allow Sprint to more fully benefit from the resources at its disposal. To fully capture the value of its assets, though, the firm still needs to move to a more cohesive network and brand strategy.”

  3. ed cowen
    Posted February 2, 2011 at 5:29 am | Permalink

    I live almost at the end of the world. Interstate 75 starts near Naples, Florida, crosses Florida (Alligator Alley), then heads North to my house on the Canadian border. Sprint is the new kid in town. I don’t like my current carrier (Verizon) so thought I would check out Sprint. Their website indicates that calls cannot made from inside cars, also not from within buildings. You have to be outside. Unfortunately it is sometime 35 degrees below zero outside. Talk fast

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