On Aug 23, we have our Neutral recommendation on Sprint Corporation (S) following mixed financial results for the second quarter of 2013. While the company’s bottom line lags the Zacks Consensus Estimates, top line surpassed the same in the recently concluded quarter.
Why Remain Neutral?
Amid much speculation, Sprint finally completed its acquisition by Softbank Corp. Early in Jul 2013, the deal received shareholders’ approval along with the U.S. Federal Communications Commission (FCC) clearance. We believe, the success of the acquisition deal has placed Sprint in a stronger competitive position against giant carriers like Verizon Communications inc. (VZ) and AT&T Inc. (T).
Besides improving market position, the deal aided in improving Sprint’s liquidity and facilitated key expansion plans including Clearwire acquisition. Going forward the company is taking key development plants that include building its core Sprint platform through its Network Vision program.
As part of the Network Vision strategy, the company’s LTE services currently covers over 151 markets with 20,000 sites on air. In 2013, the company expects to have LTE coverage for approximately 200 million customers. We believe the efficient use of capital, reduction of cell sites, the elimination of dual networks, backhaul efficiencies, reduced churn, lower roaming charges and energy cost savings bode well for Sprint’s long-term growth.
Hence, the network restructuring is expected to generate $10 billion to $11 billion in savings over the next seven years (2011-2017). Moreover, Sprint’s OBITDA margin is expected to grow by 1200–1600 basis points (bps) by the end of 2014. About half of the margin expansion would come from the Network Vision plan and the other half from its core operations.
However, given more than 95% U.S. wireless penetration, competition is likely to remain intense, which could pressure top and bottom-line results as carriers compete for market share. Although Sprint has started reducing its net loss in the post-paid subscriber base, we remain concerned about the return of this trend in the future.
If this course does not continue, revenues from Sprint’s wireless segment will come under pressure once again as it was iover the past several years. The decline in Sprint’s post-paid customer base is primarily attributable to intense price competition, less competitive marketing, less favorable network quality and delays in integration of back-office functions with the Nextel unit acquired.
Further, the company incurred costs related to the Nextel network shutdown which are recognized as costs related to lease exit charges, backhaul access contracts and other associated costs. These expenses amounted to $623 in the second quarter. Tax expense for the year is also expected to rise and range between $170 million and 220 million.
In addition, the company assumes the dilutive impacts of SoftBank and Clearwire transactions to be approximately $400 million. Going forward, capital expenditure for the year is expected at higher levels, estimated around $8 billion owing to higher spending on Network Vision.
Currently, Sprint has a Zacks Rank #3 (Hold)
Stocks to Consider
Another stock to consider is Cincinnati Bell Inc. (CBB), which has a Zacks Rank #1 (Strong Buy).
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