Sprint Rallies 27% On Q1 Subscriber Gains, Did The Markets Overreact?

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Sprint (NYSE:S), the fourth largest U.S. wireless carrier, saw its stock price soar by 27% in Monday’s trading, after posting a stronger than expected set of fiscal Q1 numbers. [1] While the carrier’s net loss met expectations, it beat estimates on revenues and also posted stronger than expected postpaid phone subscriber additions and churn levels, providing investors with some confidence that its turnaround is gathering steam. That said, there are concerns as to whether the recent momentum can translate into longer term gains for Sprint, on account of its sizable debt load, its reduced capital investment and potentially risky network upgrade plans.

We have increased our price estimate for Sprint to about $5 per share, on account of the recent postpaid phone subscriber gains and the extension of the forecast period for our DCF model. Our price estimate is about 15% below the current market price.

See our complete analysis for  AT&TVerizon |Sprint | T-Mobile

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Postpaid Phone Business Gathers Steam

Sprint’s added a net of 173k postpaid phone customers during the quarter, compared to a loss of about 12k customers in the year ago quarter, driven by its aggressive promotional offers, a popular advertising campaign and some network enhancements. In comparison, Sprint’s larger rival AT&T, which reported results last week, lost a net of 180k postpaid phone subscribers. Sprint also noted that it was postpaid net port positive against its three larger peers, marking the first time in more than five years that it gained more postpaid subscribers from each major carrier than it lost to them. Sprint’s postpaid phone churn figures also declined 10 bps lower year-over-year to 1.39%, marking the lowest postpaid phone churn in company history. Sprint’s postpaid average billing per user rose by about 3% year-over-year to $72, while service billings per user declined by about 6% to $59.20 amid an increasing mix of customers on subsidy-free plans.

Network Overhaul Will Be A Key Factor To Watch In The Near Term

Sprint’s recent subscriber gains come on the back of very aggressive promotions – such as offering to cut the bills of customers porting from other major carriers by half, and it remains to be seen how well the carrier is able to support its growing subscriber base and rising data traffic, as it defers network spending. Sprint significantly cut down on its capex for this year (cash capex $3 billion vs. $4.6 billion last year) on account of its high leverage and impending debt payments. In comparison, T-Mobile, which is slightly ahead of Sprint in terms of total subscribers, projects 2016 capex that is at least 50% higher.

Sprint is trying to make the most of its reduced capital budget by taking a relatively unproven (and potentially risky) route to densifying and expanding its network. For instance, the carrier will make use of tens of thousands of small cells and its deep portfolio of 2.5 GHz spectrum, rather than just working with traditional tower companies who typically require expensive long-term contracts. The success of this plan will be crucial for Sprint, which is no stranger to network issues. In fact, a problematic network upgrade carried out several years ago is partly responsible for Sprint’s recent woes, as it led to significant customer attrition.

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Notes:
  1. Sprint Earnings Press Release []