Why We Increased Our Price Estimate For Sprint

We have increased our price estimate for Sprint (NYSE:S), the fourth largest U.S. wireless carrier, from around $6 per share to about $7.50 per share, on account of its strong recent postpaid subscriber growth and its progress in reining in operating costs. However, our price estimate is still slightly below the current market price, largely due to the carrier’s high (and increasing) financial leverage and also due to the possibility of another round of price wars in the U.S. wireless market.

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Cutting Costs And Adding Lucrative Postpaid Phone Subscribers

The two key components of Sprint’s turnaround plan have been bolstering its postpaid subscriber base and cutting operating costs, and the carrier has executed fairly well on both counts. During Q3 FY’16, Sprint posted its strongest postpaid phone subscriber growth in four years, adding about 368k postpaid phone subscribers, driven by its competitive service pricing and improving network quality, beating larger rivals Verizon (167k adds) and AT&T (67k losses). The carrier is also scaling back on its operating expenses (down by $1.6 billion fiscal year-to-date), driven primarily by lower roaming and backhaul expenses. The company is targeting $2 billion or more of run-rate operating expenses by the end of the fiscal year ended March, with plans for further reductions in 2017 and beyond.

High Leverage And Recent Pricing Moves By Rivals Could Hurt

While Sprint’s operational improvements are quite encouraging, the carrier does face two key risks. Firstly, Sprint’s debt load stood at a high $37.3 billion as of December 31, 2016, and the number has actually been trending upwards in recent years (it stood at $33.7 billion in December 2015 and $32.4 billion in December 2014). While the carrier has been bolstering its total liquidity position by mortgaging assets ranging from spectrum to wireless infrastructure, allowing it to meet near-term obligations, it will have to return to net profitability, while generating positive cash flows to ultimately pare down debt. This could prove challenging in the near term, given the recent pricing moves by major carriers. For instance, T-Mobile recently began offering all-in pricing for its latest One plans, effectively reducing its service pricing, while larger players have also been offering attractive promotions on handsets.

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