Sprint vs. the Market Leaders – Taking a Look at Spending Levels

Sprint (NYSE:S) competes with AT&T (NYSE:T) and Verizon (NYSE:VZ) in the mobile phone business. Sprint has been working to turn its subscriber loss streak around as this trend has plagued the company over the past few years. Sprint has suffered postpaid subscriber losses both on CDMA and iDEN platforms. However, the trend in CDMA subscriber additions is improving and the company plans to migrate iDEN customers to the CDMA platform in hope of curbing losses.

This initiative will require investment. The company will be spending capital to improve its network, through which it could achieve both subscriber growth and operational cost savings (see Sprint Investing in Network Modernization, Upside Potential to Stock).

Our price estimate for Sprint stands at $4.35, and we estimate that the company generates roughly 43% of its equity value from mobile phones and plans.

Capital Expenditures as a Percentage of Revenues

Given the necessary spending for Sprint’s initiative, we decided to examine how Sprint’s capital expenditures have trended against its peers. As it turns out, while AT&T and Verizon have comparable capital expenditures (when measured as a % of revenues), Sprint is substantially lower. The charts below illustrate this difference over the past 3 years. ^[1]

Capital Expenditures as % of Revenues

The chart above shows that AT&T and Verizon have trended in line with each other when it comes to capital expenditures relative to revenues earned by their wireless segment. However, Sprint falls far behind. Notably, the year-to-year trends are similar across the three companies, with capital expenditure levels decreasing in 2009 and recovering in 2010.

Outlook for Sprint’s Spending

So why is Sprint’s capital expenditures relative to revenues so low? Sprint, faced with subscriber losses, has cut down on capital expenditures in order to save costs. But can they realistically continue at these levels going forward?

See our full analysis and $4.35 price estimate for Sprint

AT&T and Verizon are certainly spending more relative to revenues, and these two are the market leaders. What that means is that the spending levels they define could set the tone for the industry going forward. Tablets and smartphones are going to drive high data usage in the future. Now add to that other connected devices like smart cars, e-readers and wireless operator’s data management of smart grids.

It seems that Sprint may be forced to raise its capital expenditures in the future, and we hope to receive greater clarity on this measure during the company’s February 10th earnings release. Nevertheless, the company’s stock is very sensitive to this driver given Sprint’s levels of financial leverage.

Drag the trend line in the modifiable chart above to see how changes in capital expenditures (as a percentage of gross profits) affect Sprint’s stock value.

1. Calculated from revenue and capital expenditure data available in SEC filings [↩]