Tuesday, March 9, 2010

Sprint-Nextel Corp. (NYSE: S): Better Days Ahead?

The turnaround potential of Sprint Nextel Corp. (NYSE: S), the third-largest US wireless carrier, is vastly underestimated by investors and Wall Street analysts.

Recently, Chief Financial Officer Bob Brust told investors the telecommunications company plans to pay down its debt and continue to strengthen its balance sheet. "(In) the next 30 months, we have about $5.2 billion of debt coming due. Right now we plan to pay that as due, not refinance," said Brust at the Raymond James Institutional Investors Conference, according to a transcript.

He also told investors that after 10 percent declines in Sprint's revenue for each of the past two years, "this year we hope it is more stable or flattish."

Brust said that its postpaid, or contract, customer losses are "narrowing quite a bit," while prepaid "has gotten much stronger." This, he added, should help stabilize revenue, and "maybe in the next several quarters, we will actually see some growth in revenue which would be the end of the turnaround." Brust also said Sprint is trying to achieve the "leanest possible cost structure," but at the same time it must also reinvigorate revenue growth. "Because if we just cost reduce and don't turn around the revenue, it will never end. I mean we will just end up with nothing," he said. "So we have to get this revenue going."

The company is working hard to reduce its costs and improve customer retention. In December, the wireless service provider said it would slash up to 2500 jobs by the end of the year, as part of plans to cut annual costs by at least $350 million.

Total subscriber loss in fourth quarter of last year was 148,000, compared to 1.27 million last year and 545,000 in the previous quarter. In retail post-paid subscribers, net losses were 504,000, compared to 1.11 million last year, and 801,000 in the third quarter. Churn rate in retail post-paid segment reduced to 2.11% from 2.16%, from fourth the quarter of 2008. In retail pre-paidb segment, churn declined to 5.56% from last year's 8.20%.

Despite weaknesses in other segments, the company's pre-paid brand, Boost Mobile has continued to attract subscribers. It offers unlimited voice and text for $50 per month and is targeted at lower income, and younger customers. In retail pre-paid subscribers ARPU rose to $31 from $30, due to national Boost Monthly Unlimited offering.

Sprint's prepaid segment is also expected to get a boost by its acquisition of Virgin Mobile. Industry experts contend that the purchase could help Sprint reverse the losses in subscriber count and lead to net growth in 2010.

Looking ahead, Sprint Nextel expects that both post-paid and total subscriber losses will improve in 2010, as compared to 2009. In addition, the company expects to continue to generate positive Free Cash Flow during 2010.

In fiscal year 2009, the company generated considerable free cash flow of $2.8 billion 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.

Sprint Nextel is also focusing on nationwide expansion for its fourth-generation (4G) wireless broadband service. The company made history by becoming the first US carrier to launch 4G WiMax mobile broadband services in the U.S. with the official commercial service launch in Baltimore in early October 2008. As a majority owner of Clearwire, Sprint is poised to cash in on the business, if it is successful. Last month, Sprint Nextel announced that it would begin offering a 4G smartphone in the next several months.

The company's customer service is improving and this will have a direct positive benefit on future earnings. Customer satisfaction has improved for seven sequential quarters and fewer customer issues has allowed Sprint to shutter 27 call centers in the past two years. Thus, in light of above factors, it appears that Sprint stock have little downside and significant appreciation potential.

Full Disclosure: None.
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