On Friday, embattled wireless carrier Sprint’s (NYSE:S) shares fell by around 20% after it announced plans to raise additional capital to fund the launch of its LTE service by mid-2012. This morning it is down an additional 5%. This move will take it away from the currently deployed WiMax as its 4G technology of choice.  Although this switch will help support faster data speeds, investors dumped its shares fearing the impact of additional debt the company will have to incur to meet this aggressive rollout plan.
High Debt Might Derail the Stock
Sprint already has a highly leveraged balance sheet, with net debt of $11.4 billion compared to a market cap of merely $7.2 billion. The announcement that it will likely need to raise more capital to fund the LTE will make the balance sheet even less attractive. While we believe that the market’s response has been somewhat exaggerated, it is not entirely unwarranted.
If we tweak the Trefis model for Sprint to include increasing capital expenditures in the next five years, we can see that the stock price forecast plummets, showing a high sensitivity to capital expenditures.
LTE, Network Modernization Plan
Currently, Sprint’s WiMax network is being provided by network provider Clearwire (NYSE:CLWR). By chalking out a plan to spend on its own network and gradually phasing out Clearwire, Sprint’s management has indicated that it believes this will decrease the operating costs of wireless data transmission. To understand the upside potential this presents, this move should be viewed in conjunction with the company’s Network Vision Project that will eliminate one of the two discrete networks the company operates, cutting costs substantially as well as the recently announced plan to provide iPhone users with unlimited data plans.
The margins on unlimited data plans are usually lower, but the decreased network costs will enable the company to provide these plans without taking a long-term hit to margins. If successfully implemented, this should translate into increased market share in the wireless market with little to no impact on margins.
Sprint is treading a very fine line here by betting on its own LTE network and the iPhone deal. If the company is able to lure iPhone users with its unlimited data plans and at the same time increase speeds and eventually cut costs by using its own 4G network, the long term prospects look good.
However the significant debt balance leaves the company with little room for error.
In light of Friday’s sell off, our $4.75 price estimate for Sprint’s stock is about double the market price.Notes:
- Sprint accelerates deployment of network vision and announces national rollout of 4G LTE, Sprint newsroom, October 7th, 2011 [↩]