Sprint Worth $3.70 Despite Margin Pressure From iPhone

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Sprint’s (NYSE:S) stock has come under a lot of pressure lately, falling by close to 7% since the company announced its fourth quarter results last week. The company reported a $1.3 billion net loss in the quarter, its largest quarterly loss in three years, as the heavily subsidized iPhone weighed on its margins. Additionally, the carrier guided for an aggressive 2012 in terms of capital spending on its Network Vision plan, as it builds out a new high-speed LTE network in order to stay competitive with rivals Verizon (NYSE:VZ) and AT&T (NYSE:T) in an increasingly competitive wireless industry.

See our full analysis of Sprint’s stock here

Postpaid subscriber guidance not met

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At the start of the third quarter earnings call, Sprint’s CEO Dan Heese had pinned great hopes on the iPhone for a turnaround in the company’s fortunes, terming it as the “number one reason” why new customers don’t try Sprint’s network. His faith was repaid somewhat as the iPhone brought in around 720,000 new postpaid customers to Sprint’s network, 40% of the 1.8 million total activations in the quarter. However, this was not enough to meet the company’s prediction of posting net postpaid adds for the full year.

It is important for Sprint to benefit strongly from the iPhone, considering the company made a huge $15.5 billion upfront commitment to buy iPhones from Apple over the next four years. It is therefore not a good sign that the company was unable to meet its own guidance on the iPhone front. However, it’s still early for Sprint and the iPhone, and the company has had a relatively good start given that a majority of postpaid churn came from Nextel’s legacy iDen network. We expect this trend to continue or even accelerate throughout 2012, as Sprint starts to decommission the network.

Margin contraction and capital expenditures to continue

The iPhone also significantly cut into Sprint’s margins as the huge subsides associated with the smartphone cost the company almost $630 million, or about $350 per phone. This brought the company’s OIBDA margins down to 10.8 percent, compared to 18.2 percent in the third quarter. We expect the margin pressure to continue in the near-term. Further, we also expect SG&A expenses to remain at elevated levels as selling expenses owing to the newly added iPhone continue to mount.

Sprint’s capital expenditures continued to escalate in the fourth quarter, to $900 million compared to $760 million in the third quarter and $608 million in the fourth quarter of 2010. Sprint has also guided for 2012 capital spending of almost $6 billion, compared to $3.13 billion last year, as the company focuses on its network modernization project and improving data capacity following the iPhone launch. Sprint expects to launch its 4G LTE service in six major markets by mid-2012. In comparison, Verizon already has 195 markets covering 200 million people. AT&T has 26 markets covering 75 million.

We have reduced our price estimate for Sprint’s stock to about $3.70, taking into account the significant increase in capital spending as well as the impact of the iPhone on its gross margins and SG&A.