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Sprint Can Still Have a Comeback


Although there are few short-term catalysts to ignite it, a turnaround is possible.

Sprint Nextel (S) continues to frustrate its long suffering shareholders. But now is probably not the time to follow them to the exits. There are some faint signals that the stock might be worth a second look.

Let's be honest, Sprint is hardly a pretty sight. A distant third in the US wireless market behind AT&T (T) and Verizon Wireless -- a joint venture of Verizon Communications (VZ) and London-based Vodafone (VOD) -- Sprint's shares have taken a beating over the past few years. Fierce competition and regrettable strategy and execution decisions have left Sprint struggling to hold on to customers and revenues.

Last quarter, the wireless carrier lost a net total of 69,000 net subscribers. To put that number in perspective, Verizon Wireless and AT&T gained 2.2 million and 2.7 million subscribers, respectively, over the same period. Sprint lost nearly $1 billion last quarter.

The news isn't good. But there are a few reasons to think things may not get any worse. In fact, if you look hard, you might see some signs of a quiet turnaround at work.

In what amounted to an eye-catching surprise, last quarter Sprint actually gained a few post-paid wireless subscribers. Of course, naysayers normally point out that improvements only come at the expense of profit margins -- in other words, Sprint would have to pay through the nose to grab new customers.

This time around, that doesn't appear to be the case. EBITDA came in on target in the fourth quarter, which suggests profitability isn't getting sacrificed for new subscribers. Given that the improvement came in the face of intense marketing and price campaigns from Verizon Wireless, AT&T, and T-Mobile (DT), this could be a sign that subscribers and cost are starting to stabilize at Sprint.

While Sprint runs at a considerable loss, the company generated considerable free cash flow of $2.8 billion for the year compared with $1.8 billion in 2008. The company said it would pay down $5.2 billion in debt coming due through 2012 with cash and free cash flow. Right now, Sprint has about $3.9 billion in cash and marketable securities, which suggests that the company is confident that it can produce at least another $1.3 billion in cash before then.

Of course, Sprint may use cash and shares to build up its flagging prepaid wireless business by scooping up little prepaid players such as Leap Wireless (LEAP) or MetroPCS (PCS), which run on the same technology standard as Sprint. While such a move would put pressure on the company's finances, over the longer term it might just put Sprint on a firmer footing when it comes to the prepaid market.

In any case, it will take many quarters for a meaningful turnaround to take effect. So, it's worth looking at the stock's valuation. At $3.30 the stock is trading on an EV/Revenue multiple of less than one and EV/EBITDA multiple of just four. Moreover, thanks to all that free cash flow it generates, Sprint offers a whopping free cash flow yield of 25%. Verizon and AT&T, by contrast, produce yields of about 10%. The market gives each Sprint subscriber a value of about $420, a hefty discount to the $600 to $1,000 values given to AT&T and Verizon subs.

Of course, with few short-term catalysts available to ignite them, Sprint shares could be dead money for some time. But investors should not write off a turnaround.
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No positions in stocks mentioned.
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