“Look at Sprint Nextel. Up more than 10% today, its the hottest stock in the S&P 500, raised to Outperform from Neutral at Credit Suisse. On its way to six bucks a share, they like the progress of the turn around.” — CNBC’s Squawk on the Street 11/16/2009
Sprint Nextel (S) is trading nearly 13% higher on extremely heavy volume following two positive bits of news. First, the company received an upgrade from an analyst at Credit Suisse (CS) to the firm’s bullish Outperform stance. They had initiated coverage at a neutral rating just under a month ago, but in that time they have been swayed by the turn around efforts underway at Sprint. One thing is for sure, up to this point the market has not bought into the turn around. While the S&P 500 has advanced nearly 60% since it bottomed in March, coming into the day Sprint was actually down about 6% since that time.
The analyst believes that the worst is behind Sprint Nextel as they will likely break even in retail subscriber growth in this quarter. If he is correct, this would be the first quarter since 2Q07 that the firm has not experienced a net loss in subscribers. Also, Credit Suisse says that the deal to buy Virgin Mobile (VM), expected to close in the fourth quarter,
should provide a catalyst for the stock. They have raised their price target to $6, which would be almost double where the stock ended last week. While this is Sprint’s first major upgrade in some time, in the last month many analysts have begun to raise estimates of earnings for this year and next.
The other piece of good news, announced separately of the analyst upgrade, was that Sprint Nextel is paying down $1 billion of debt that it had accrued on a $4.5 billion revolving credit facility. The company said that after this payment they will have no debt outstanding in that facility. This is a step in the right direction for the company that had nearly $22 billion in debt on their balance sheet at the end of September. At the end of the quarter the stock had more debt outstanding than shareholder equity, which has been a major strike against them in our analysis. While that might still be the case at the end of this fiscal year, we are hopeful that paying down debt will continue to be a priority going forward.
As you can see from our historical valuation chart, we continue to believe that this stock is Undervalued. The last couple of years have been just awful for Sprint, but so much of the difficulty has been priced into the stock. When a stock has fallen out of favor like Sprint has, it only takes a few things to go the right way for the shareholders to really benefit. The projections for break even subscriber growth and the emphasis on strengthening the balance sheet are positive developments for Sprint.
