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Investment Overview for Sprint (NYSE:S)
Below are key drivers of Sprint's value that present opportunities for upside or downside to the current Trefis price estimate for Sprint:
Mobile Plans & Phones
Sprint Postpaid wireless market share: We estimate that this figure will increase moderately from about 9.8% in 2015 to about 10% by 2017 and remain relatively flat thereafter. This is likely to be driven by a subscriber shift towards high speed 4G and data as well as Sprint's improving network quality. However, if Sprint's market share declines to about 9.5% by 2022 owing to intense competition or hiccups in in planned network upgrade, this could result in a 15% downside to our price estimate. On the other hand, if Sprint does well and captures 10.5% market share by end of our forecast period, there could be a 15% upside to our price estimate.
Mobile SG&A as % of gross profits: We expect this figure to decline from about 40% in 2015 to around 33% in 2016, as Sprint puts its aggressive cost reduction plans into effect. Over the long-term, we expect the figure to trend marginally upwards to about 37% by 2022. If the number rises to around 40% by in 2022, this could result in a 10% downside to our price estimate. On the other hand, if the number remains at levels of about 33% through 2022, there could be an upside of over 20% to our current price estimate.
Postpaid ARPU: We estimate that this number will gradually improve from about $54 in 2015 to about $59 by 2022 driven by Sprint's improving network quality and higher mobile data consumption on Sprint's 4G network. However, if intense competition or other headwinds cause the number to remain at current levels, there could be a downside of 20% to our current price estimate. On the other hand, if Sprint is able to improve pricing to over $63 by 2022, this could result in a 20% upside to our price estimate.
Sprint Nextel resulted from the $35 billion merger of Sprint and Nextel in 2005. Following shutdown of the Nextel network in 2013 and the subsequent acquisition of a majority stake in Sprint Nextel by Softbank, the company reverted to its old name, Sprint Corporation.
The company makes money primarily through mobile phone subscription plans for consumers and businesses. It is the fourth largest wireless service provider (behind Verizon, AT&T and T-Mobile) in the US. It also provides its wireless network resources for resale to wholesale and regional operators. Sprint also offers voice and data communication services over legacy fixed-lines.
Saturating wireless market
The U.S. wireless market is saturating, with the total number of wireless connections standing at over 355 million and the number of wireless phone subscribers standing at roughly 320 million, ahead of the U.S. population of about 319 million. It's likely that growth in the number of wireless phone connections - which represents the most lucrative segment of the wireless market - will slow significantly going forward. Carriers are likely to focus on retaining existing customers and winning over porting customers, while driving an incremental upside from areas such as connected devices and tablets, M2M connections and wholesale services to drive growth in service revenues.
Highly leveraged balance sheet
Sprint is very highly leveraged, with a net debt of over $31 billion (excluding capitalized operating leases) as of September 2016. The carrier has been walking a tight rope, as it continues to burn through cash in order to bolster its postpaid base and improve network quality. While Sprint has been taking steps to cut interest costs and monetize its assets via sale and leaseback arrangements, the carrier will ultimately have to turn profitable and generate positive free cash flows in order to reduce its debt load.
Sprint's network upgrade plans
Sprint is being circumspect with regard to network improvement expenditures. The carrier elected to sit out of the potentially expensive 600 MHz spectrum auction, taking a more unproven route to densifying and expanding its network. The carrier intends to upgrade its existing macro cell sites to support 800 MHz, 1900 MHz and 2.5 GHz for LTE, while also deploying thousands of new macro sites and tens of thousands of small cells, in a move that should help to improve capacity as well as coverage. The progress of the network improvement plan, which we view as a relatively high-risk, high-reward type exercise will be a key near-term factor to watch for Sprint.
Sprint's aggressive promotions
The most important part of Sprint’s turnaround plan has been to bolster its subscriber base and the carrier has been performing well in this regard over the last several quarters, driven by its aggressive promotional offers – which included offering new customers half-off their bills from their existing carriers and leasing the latest iPhone for as little as $1 a month. Sprint added a total of 347k postpaid phone customers during Q1 FY'16,a 4x increase over the same quarter last year.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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