Sprint’s recently announced Ericsson deal could mean an even bigger up-side to our $5.28 Sprint stock price estimate which is 23% above Monday’s closing price of $4.30.
Last week, Sprint Nextel announced a seven-year services agreement with Ericsson whereby Ericsson will takeover the day-to-day operation and maintenance of Sprint’s mobile phone and landline network. Although Sprint will retain ownership of its network, the company believes that Ericsson can operate it more efficiently leading to operational savings for Sprint over time. More importantly, it believes this will free-up resources for Sprint to focus on attracting new customers.
Will the speculated $100 million in annual savings materialize, and could reallocation of resources prevent Sprint’s Selling, General & Administrative (SG&A) Expense from eating up more and more of its declining gross profits? We have forecast Sprint’s SG&A as a % of Gross Profit to increase from ~51% in 2008 to ~61% in 2009 due to a combination of declining revenues and gross profits, as-well-as increasing marketing costs from customer retention efforts.
Within Sprint’s content on our platform, you can see how much Sprint’s stock price would appreciate if Sprint’s SG&A as % of Gross Profits were to stay at historical averages of about 50%.
