Sprint’s iPhone Deal Not as Bad as You Think
Two conflicting views on the stock sent Sprint (NYSE:S) into a tizzy on Friday when Moody’s downgraded its credit worthiness and at the same time Credit Suisse (NYSE:CS) reiterated its Outperform rating on the stock. [1] [2] The iPhone 4S launch acted as a positive trigger for the stock as it ended the day with a marginal 0.36% gain.
Moody’s raised concerns over the company’s decision to add to its huge pile of debt in order to build its own 4G LTE infrastructure while Credit Suisse sounded optimistic that the iPhone deal may not be as dilutive of the company’s margins as initially thought.
Our $4.73 price estimate for Sprint’s stock is about 70% above the market price.
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See our complete analysis for Sprint stock here
Prospects good but only in the longer term
We have similar concerns as Moody’s which we had voiced in one of our earlier notes, Sprint Plunges on LTE Expansion Costs, May Tap Capital Markets. However, we also believe that if executed well, the company will be able to lure iPhone users with its unlimited data plans and at the same time increase speeds and cut costs eventually by using its own 4G network, thereby making the long term prospects look good.
The iPhone usually comes associated with huge subsidies that carriers offer to subscribers in exchange for signing up for a two-year contract. Markets had punished the stock severely for having failed to disclose costs related to the iPhone deal which led to Chairman James Hance acknowledging management’s mistake and promising to announce the costs by the end of the month. We had discussed how uncertainty is harmful for a stock and lauded Hance for what was a smart, albeit late, move. (see Sprint’s Stock Gains as Chairman Pledges Candidness on iPhone, LTE Strategy)
Volatility will continue to be seen in the stock until the costs of the iPhone deal are publicly disclosed. However, strong pre-orders and sales of the iPhone show that Sprint’s bet may not have been so reckless after all.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- Sprint: Moody’s Cuts Bond Rating; Shoulda stuck to ClearWire, Barrons, Oct 14th, 2011 [↩]
- Sprint: Buy, Says Credit Suisse, iPhone Math Not That Bad, Barrons, Oct 14th, 2011 [↩]