Sprint Stock Doubled This Year: Was The Rally Justified?

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Sprint‘s (NYSE:S) stock has surged by over 120% this year, outperforming its larger peers such as T-Mobile (+40%) , AT&T (+12%) and Verizon (+8%), driven by stronger than expected subscriber growth, cost cutting and moves to shore up its financial position. Below we outline some of the key factors that have been influencing Sprint stock this year and review whether the rally was justified.

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  • Sprint added a net of 542k postpaid phone subscribers over the first nine months of 2016, while posting positive port ratios versus its larger rivals over the last two quarters. While these gains are largely driven by promotions such as offering 50% off porting customers’ existing bills, Sprint’s improving LTE network has also been a factor in attracting new customers. This should enable the carrier’s revenues to grow going forward.
  • Sprint has also been cutting down on its network expenses (down by about 14% over the first half of fiscal 2016) amid lower backhaul and roaming costs, with SG&A expenses also down 19% year-over-year. The carrier is looking to achieve a sustainable reduction of $2 billion or more in run-rate operating expenses exiting fiscal 2016. This should bode well for its operating margins going forward.

  • Sprint has been improving its liquidity position, with its cash and cash equivalents standing at $5.7 billion, leveraging its handset leasing and network equipment vehicles, with another $5 billion+ coming from unsecured financing facilities and revolving bank credit. The carrier is also working to reduce its interest burden, by leveraging its spectrum assets as collateral to borrow as much as $3.5 billion, at rates that are roughly half its current effective interest rates. That said, the carrier’s debt load has been trending upwards over the last three years and its ability to pare down debt will ultimately hinge on its return to profitability and positive free cash flow generation.

  • Sprint’s stock has risen by roughly 25% since the election of Donald Trump to the U.S. presidency.  The markets appear to be betting that the new presidential administration could be more amenable to consolidation within the telecommunications industry, rekindling prospects of a potential merger between Sprint and T-Mobile. While Softbank and Deutsche Telekom, the respective parent companies of Sprint and T-Mobile, have both indicated that they remain open to a deal, we believe that the chances are slim given T-Mobile’s high market cap and the presence of other potentiality deeper-pocketed bidders (related: Despite The Chatter, A Sprint T-Mobile Merger Remains Unlikely).

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