We are maintaining our long-term Neutral recommendation on Sprint Nextel Corp. (S) shares to reflect the absence of a directional momentum in the company’s earnings estimates.
Sprint is experiencing a turnaround in its post-paid wireless business after several years of focussing on cost containment and business stabilization issues.
Sprint added 58,000 net post-paid customers during the fourth quarter, reflecting considerable improvement from a net loss of 504,000 in the year-ago quarter and 107,000 in the previous quarter. This represents the first quarter of net post-paid additions since the second quarter of 2007.Sprint also generated the best ever postpaid churn in the fourth quarter and fiscal 2010. Prepaid churn was also the best in five years.
Sprint, the third-largest U.S. wireless carrier, lost approximately 9 million post-paid customers since the beginning of 2007, while two dominant industry players Verizon Communication Inc. (VZ) and AT&T Inc. (T) continued to add subscribers.
In the recently concluded quarter, despite outstanding numbers from the post-paid business, Sprint reported a net loss of 31 cents. The quarter’s results missed the Zacks Consensus by 2 cents but improved 3 cents year over year. The increase in subscriber base through expanded fourth generation long-term evolution (4G LTE) services contributed to the year-over-year increase. Revenue improved 3% from the year-ago quarter and outpaced the Zacks Consensus Estimate.
Sprint is expected to benefit from increased penetration of smartphones, rising average revenue per user (ARPU) and lower churn in the post-paid wireless segment. We believe an attractive wireless product/service mix, wider 4G network footprint, prepaid brands like Assurance Wireless and Virgin Mobile, Boost Mobile’s Monthly Unlimited plans as well as the Network Vision initiative will continue to add opportunities in the wireless businesses.
On the flip side, given more than 95% U.S. wireless penetration, competition is likely to remain intense, which could pressure top and bottom-line results as Sprint competes to gain market share. Sprint is now no longer the only major carrier offering the 4G network. The company’s market advantage for its 4G wirelesss service has been eroded as other carriers started offering competitive services. Verizon covered approximately 38 markets with around 110 million people by the end of December 2010. Sprint might see additional pressure from Verizon’s iPhone launched in early February.
Further, heavy expenditures involved in the deployment of 4G services and Network Initiative will dilute margins and free cash flow in the initial years of implementation.
Our long-term recommendation is supported by the Zacks # 3 (Hold) Rank.
SPRINT NEXTEL (S): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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