Sprint Is Worth $3.75 But Expansion Costs Worry Investors

by Trefis Team
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Sprint’s (NYSE:S) shares fell 6% Monday on fears that it may be mismanaging its Network Vision project and incurring higher capital expenses than previously anticipated. According to Bloomberg, citing a Detwiler Fenton & Co. report, Sprint reclaimed about 250 employees that were previously assigned to Ericsson, its principal network equipment vendor. [1] The critical report called the reassignment of employees a ‘black eye’ for Ericsson and saw it as a sign of trouble for a heavily debt-laden Sprint that is aggressively trying to execute its multi-billion dollar Network Vision strategy.

While the market’s nervousness is understandable considering the high sensitivity of Sprint’s stock to an increase in capital expenditure and its highly leveraged balance sheet, we believe the shift in employees must be seen in the context of the changes that Sprint’s network is seeing now as against 2009 when it had signed on Ericsson to manage its network.

We maintain our $3.75 price estimate for Sprint’s stock, which is about 20% higher than the market price.

See our complete analysis for Sprint

Network expansion made job shift necessary

Three years ago, Sprint’s network was pretty stable and its network spending pretty low, as can be seen in the graph below. However, today, under the Network Vision plan and the subsequent high capital expenses, Sprint’s network is rapidly changing with the infrastructure being overhauled, iDEN being phased out and a simultaneous expansion in LTE. [2]

Moreover, the iPhone’s arrival which has brought in a good number of new subscribers to its core CDMA platform has also increased the demand on Sprint’s network, necessitating a more in-house approach to identifying areas of high network demand and engineering the network efficiently. Further, the number of jobs being shifted is just a fraction of the 6,000 Sprint employees that were transferred to Ericsson three years ago – hardly a sign that Sprint may have mismanaged its Network Vision plan announced much later in December 2010.

That said, Sprint is now highly sensitive to any change in capital spending having piled on debt in order to fund its network upgrades. It has already tapped the debt market twice over the past eight months and secured vendor financing for the network upgrades as well. You can see how the stock price plummets when you tweak the trend-line in the chart below to increase capital expenditure over our forecast period.

Network Vision Plan bodes well for Sprint

However, while the Network Vision plan is very expensive, a successful implementation of the strategy will reduce the operating expenses substantially by eliminating the duplicate fixed costs of maintaining different networks. It will also allow for better 3G/4G coverage and reduce roaming costs as the spectrum previously used for iDEN would be utilized for the CDMA/LTE network.

As LTE adoption rates rise and the iPhone brings in highly lucrative postpaid subscribers, Sprint will also see its data ARPU levels rise in concert. Sprint’s unlimited LTE plans will help it maintain its niche and differentiate itself from rivals’ tiered data plans. Unlimited plans will likely be more valuable for LTE than they were for 3G since LTE is a higher-speed technology and will cause subscribers to easily overshoot their monthly quota for tiered plans. (see Sprint Promotes Unlimited Plans As Verizon, AT&T Move To Shared-Data Plans)

The iPhone, for its part, will bring in the high data users and continue to have a positive impact on ARPU levels. Sprint’s postpaid ARPU for its core CDMA platform in the most recent quarter jumped $3.70, or 6.6%, versus the same period last year, as the iPhone accounted for a huge number of new subscribers to Sprint.

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Notes:
  1. Sprint Shares Fall Amid Concern Over Expansion Of Network, Bloomberg, June 25th, 2012 []
  2. Shift in Sprint’s outsourcing deal sparks bout of nerves, Rethink-Wireless, June 26th, 2012 []
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