Sprint's bankruptcy risk recedes

But the telecom's fortunes will rise or fall depending on how it handles Apple's new iPhone 5, according to one industry bear.

By TheStreet Staff Sep 27, 2012 1:13PM

TheStreet.com logoWoman sitting on steps with smartphone copyright Image Source, Image Source, Getty ImagesBy Antoine Gara

 

Bankruptcy is off the table for Sprint (S). As it struggles to compete for Apple (AAPL) iPhone 5 profits with larger telecoms AT&T (T) and Verizon (VZ), at least Sprint doesn't have to worry about the most vocal telecom bear on Wall Street raising the prospect of doom for the company.

 

After assigning a 50% likelihood in March that Sprint would end up in bankruptcy as it raced to build a national wireless network to handle smartphones like the iPhone 5 and compete with stronger carriers -- and citing bond trading prices -- telecom sector bear Craig Moffett of Bernstein Research now says that readily available financing makes that prospect remote. However, amid a 100%-plus stock rise for Sprint in 2012, Moffett says that even if bankruptcy is not a near-term risk for Sprint shareholders, significant risks remain.

 

Overland Park, Kan.-based Sprint's fortunes will rise or fall depending on how it handles Apple's newest smartphone, the iPhone 5, argues Moffett in a Sept. 27 research note.

 

In a best case scenario, the company's unlimited data plans may appeal to data hungry iPhone users and the continued rollout of its upgraded national LTE network will ably handle surging network loads.

 

He maintains a bearish view on the company, though, questioning whether Sprint's network can handle iPhone 5 data loads or whether profit margins can be maintained.

 

"Sprint's recently ready access to credit has greatly diminished its near-to-medium term bankruptcy risk," writes Moffett. "From here, Sprint will have to show that it really can pull off a turnaround in fundamentals -- that is, can it sustainably gain share and grow?" asks Moffett. He isn't optimistic.

 

Citing a continued network disadvantage to competitors AT&T and Verizon and the prospect that profit margins drop sharply in coming quarters, Moffett holds an "underperform" rating and a $3 price target on Sprint shares. With the launch of the iPhone 5, those issues may come to a head for Sprint, as financing fears recede.

 

"Even after Network Vision is completed, we believe its LTE network will be badly disadvantaged, likely to be highlighted by the iPhone 5. Sprint's high ARPU growth appears poised for rapid deceleration," writes Moffett.

 

In March, Moffett wrote in a research note that bond investors were pricing in a 50/50 probability of a bankruptcy filing by Sprint over the next five years as the nation's third leading wireless carrier struggles to build a next generation wireless. At that time, Moffett ascribed a $2.50 price target for Sprint -- less than half of current share prices after a 130%-plus year-to-date rally.

 

Moffett highlighted two scenarios in March for Sprint playing out with investors split evenly on the company's prospects, as it spends billions to build a nationwide 4G network.

 

"In the first, the company successfully navigates its complicated Network Vision upgrade, stabilizes Clearwire's financial position, and delivers a compelling 4G product," he wrote. "In the second, some combination of its gargantuan take-or-pay contract with Apple, a hobbled 4G offering, and a stupendous debt burden bring the company to its knees," noted Moffett.

 

Last October, Sprint announced a $15.5 billion four-year deal to carry Apple's iPhone and keep pace with its larger competitors who already had subscribed millions of users. That deal, a commitment to improving smartphone services through a program called "Network Vision" and a multi-billion dollar 4G build with Clearwire are Sprint's focus for 2012 and 2013, after it walked away from a $7.3 billion acquisition of MetroPCS (PCS) in February.

 

While Moffett hedged his predictions in March and is now withdrawing from bankruptcy talk, his maintenance of an "underperform" rating on Sprint reflects wider industry concerns -- mainly whether the launch of the iPhone 5 will disrupt what has been a banner year for telecom profits and margins.

 

A cycle of upgrades to the iPhone 5 -- subsidized by carriers like Sprint, Verizon and AT&T -- may cut at industry margins. Meanwhile, an expected surge in data loads may differentiate strong networks from the weak, undercutting the attractiveness of unlimited data plans.

 

For more on Sprint and wireless carrier shares, see why investors should be wary of record iPhone 5 sales. Also see why the iPhone 5 may pop a telecom dividend bubble, for more on Moffett's bearish outlook.

 

For more on the wireless industry, see why AT&T is still hungry for more spectrum and how a tower deal twists industry consolidation.

 

 

More from TheStreet.com

3Comments
Sep 27, 2012 1:29PM
avatar
This company should go bankrupt, their service STINKS.
Sep 27, 2012 3:43PM
avatar
This probably won't hold true for long due to the widespread issues affecting the iPhone5 on Sprint's network.      
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

124
124 rated 1
266
266 rated 2
452
452 rated 3
702
702 rated 4
671
671 rated 5
604
604 rated 6
640
640 rated 7
495
495 rated 8
267
267 rated 9
158
158 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ABBVABBVIE Inc10
ATVIACTIVISION BLIZZARD Inc10
CTSHCOGNIZANT TECHNOLOGY SOLUTIONS10
LUVSOUTHWEST AIRLINES CO.10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.