According to information gathered from the Sprint’s 10K document for 2012, Sprint Nextel Corporation was incorporated in 1938 under the laws of Kansas and over the years has become the third largest operator (53 Million subscribers) in the United States behind AT&T and Verizon. Sprint offers wireless services to subscribers in all states, including Puerto Rico, and the U.S. Virgin Islands under the Sprint corporate brand, which includes brands such as Sprint, Nextel, Boost Mobile, Virgin Mobile, and Assurance Wireless.
The company’s services are transmitted over networks that utilize third generation (3G) code division multiple access (CDMA), integrated Digital Enhanced Network (iDEN), or Internet protocol (IP) technologies. Sprint now also offer fourth generation (4G) services utilizing Worldwide Interoperability for Microwave Access (WiMAX) technology through their mobile virtual network operator (MVNO) wholesale relationship with Clearwire Corporation and, just recently they have begun to rollout their Long Term Evolution (LTE) technology as part of our network modernization plan. MAJOR COMPETITORS
For this paper, Verizon and AT&T are identified as Sprint’s primary competitors.
According to information from Verizon’s 10K document, the company reported having a customer base at the end of fiscal 2012 of over 108.7 and recorded just over $110B in revenues. This makes Verizon the largest telecoms operator in the United States in as it relates to the company’s customer base. AT&T’s 2012 10K document reported the company’s customer base as being 103 million and gross revenues just over $127B. In terms of subscribers, this makes AT&T the second largest customer base in the United States. SPRINT’S LIFE CYCLE ANALYSIS
After conducting an analysis of Sprint’s Financials for the last five years (Appendix 1), and reviewing the company’s 10K document for 2012, one canconfidently say that the company is in an expansionary phase of the maturity stage of the business life cycle. This is evident by the tremendous investment in capital intensive infrastructure such as towers and network build out in jurisdictions across the United States with the goal of increasing its market share by adding new subscribers to its network. Sprint is also building its customer base and infrastructure through its recent mergers and creating demand for its services by modifying their pricing strategies. SPRINTS ADVANTAGE
To minimize confusion over consumer pricing plans and complex bills, Sprint has introduced more flexibility in their pricing by introducing Simply Everything, Everything Data plans and Any Mobile Anytime features. They have also introduced pricing plans geared towards the business segment of their customer base with what they call Business Advantage. According to Sprint, offering customers flexible plans will help to meet individual business needs.
Sprint has also introduced Sprint As You Go which offers unlimited talk, text and data while on the Sprint network without the need for a contract. This definitely is target a younger audience which sometimes do not have the capacity to sign up for a contract. According to reports from the International Telecoms Union (ITU), there are approximately 30 million prepaid subscribers in the US, and this sector of the telecoms industry is fast becoming an important revenue stream operators. Sprint’s prepaid portfolio currently includes multiple brands, flexible enough to meet the needs to specific subscriber segments.
For example, Sprint’s, Boost Mobile brand serves subscribers who are mainly into voice and text messaging. This is accomplished through Boost’s Monthly Unlimited plan with Shrinkage service where bills are reduced after six on-time payments. On the other hand, Virgin Mobile serves subscribers who are intrigued by trendy devices and data plans. With their Beyond Talk plans and broadband plan, Broadband2Go, which offers subscribers control, flexibility and connectivity through various communication vehicles.
SPRINT’S DISADVANTAGEEven though Sprint has become very creative its pricing models and product offerings, it still lags behind its two major competitors when it comes to bandwidth offering. In the age where speed is often king, Sprint needs to catch up to the competition quickly. In a recent exercise conducted by TechHive, the top four US carriers were tested for the speed transmitted by their 3G and 4G networks. In their tests, TechHive used a Galaxy Note 2 from Samsung to test out 4G LTE, while they use the iPhone 4S to test 3G speeds. Each of those devices are sold on the four networks, so making sure there was a fair playing field is key.
During the 3G tests, T-Mobile’s network performed well showing strong downloads and uploads speeds, averaging a 3.13 mbps download and 1.04 mbps upload time. During the test, Sprint’s 3G network did not perform well with average speeds of 0.4mbps down and just 0.31 mbps up. Verizon’s network also did not perform well on the 3G, averaging a lowly 0.8 mbps down and 0.52 mbps up. AT&T came in second place for 3G testing at 2.97 mbps on the download and 0.96 mbps on the upload.
When it came to the 4G testing, T-Mobile and Verizon showed similar numbers on download, averaging around 9 mbps, while Verizon beat out T-Mobile on the upload with 5.47 mbps compared to 2.65 mbps. AT&T annihilated the competition with an average download speed of 13.15 mbps and an upload speed of 6.45 mbps, basically three times that of Sprint’s capabilities in both download and upload.
If Sprint wants to increase its customer base and improve its anemic financial performance as recorded over the last few years, it will have to catch up to the competition in a hurry. To put this issue into perspective, Verizon has had the build out advantage, now reaching nearly 300 million subscribers and AT&T has reached over 200 million Americans, while also maintaining very fast data speeds.
EXPANDING THROUGH MERGERS
According to Sprint’s 10K report, On October 15, 2012, Sprint entered into a Merger Agreement with Softbank Corp., which will give Softbank approximately 70% of New Sprint on a fully diluted basis, leaving the former stockholders and other equity holders 30% of the fully diluted equity of New Sprint.
On November 6, 2012, Sprint agreed with United States Cellular Corporation (U.S. Cellular) to acquire Personal Communications Services (PCS) spectrum and approximately 585,000 customers in parts of Illinois, Indiana, Michigan, Missouri and Ohio, including the Chicago and St. Louis markets, for $480 million in cash. According to the Sprint’s 10K report, the decision has been made to discontinue the Nextel brand in the coming fiscal. This decision is important from both a financial and well as a branding standpoint. Sprint and Nextel merged in 2005 hoping that the deal would give them greater scale to compete against Verizon and AT&T.
The merger had an estimated value of $70 billion and more than 35 million total subscribers. The report also highlighted the fact that transferring Nextel’s subscribers over to Sprint’s CDMA network was no easy task and thus the merged company continued to operate two separate networks while utilizing both brands. The merger never elevated Sprint Nextel above third place in the U.S. mobile market, which is still dominated by Verizon Wireless and AT&T. Sprint now has approximately 56 million customers but has suffered a string of financial losses.
OVERVIEW OF SPRINT’S FINANCIALS FOR 2012An analysis of Sprint financials compared to its two major competitors highlight the fact that the company has performed poorly. As outlined in appendix 1, Sprint has experienced a decline in its gross margin consistently over the last five years. It has also recorded net losses to it bottom-line for the five years used in this analysis.
The losses to Net Income has also impacted negatively on the company’s Earnings Per Share which has also been negative for the period. Sprints Free Cash Flow has declined over the last five years and in 2012 the company reported FCF of -.1,460B. Finally, both Sprint’s Return on Equity and Return on Assets have been negative over the last five years. A more detailed analysis of Sprint’s FCF, ROA, and ROE is conducted later in the paper.
According to Sprint’s Financial Statements for the fiscal year 2012, the company reported a loss of $4.3B despite an increase in net operating revenue from $33.7B to $35.3B. An increase in the percentage of sales devoted to cost of goods sold from 56.46% to 58.96% was an major contributing factor in the falling bottom line even in light of increasing revenues. |
RETURN ON EQUITY
ROE is viewed as one of the most important financial ratios, measuring a firm’s efficiency at generating profits from every dollar of net assets. Sprint Nextel’s ROE has been extremely unpredictable for the last decade. In 2012, Sprint’s ROE was reported to be -.47 while AT&T and Verizon recorded 7.43 and 2.53 respectively.
An analysis of Sprint’s financials and a review of the unemployment numbers in the US (7.6%), highlight that Sprint’s negative ROE can be attributed to the huge investment in capital intensive projects as well as the slow moving economy which has tempered demand from a company’s customers.
As stated before, the negative ROE simply means that the company is not profitable. This is an important indicator since investors tend to look for opportunities that would give them the greatest return. With that said, the ROE is usually analyzed by investors, and most try to avoid opportunities where their return would be negative.
RETURN ON ASSETSROA shows how profitable a company’s assets are in generating revenue. Sprint Nextel’s ROA has also been unstable for some time now. In 2012, the company’s ROA was -8.57 and for the same period AT&T and Verizon which recorded 2.68 and .38 respectively. Sprint is underperforming its competitors, as well as the industry average. Sprint’s negative ROA is a sign that the company is investing a great deal of capital into its expansion while simultaneously receiving little income. According to its financials, the company is also incurring significant debt which has magnified the negative impacts to the company’s ROA.
MARKET CAPITALIZATIONSprint’s Market Capitalization of $6.950 Billion for the FY2012 is substantially smaller that of Verizon and AT&T which recorded Market Caps of $153.11 Billion and $178.02 billion. Market capitalization reflects the theoretical cost of buying all of a company’s shares, but is not really what a company could be bought for. This data highlights that Sprint (a mid cap) is a much smaller company than its two main competitors which would be considered big/large cap companies since they have a market cap between $10 billion to $200 billion.
CAPITAL ASSET PRICING MODELThe Capital Asset Pricing Model (CAPM) is used in the world of Finance to describe the relationship between the risk and the expected return of an investment that is used to determine its proper price.
The Philosophy behind the CAPM is that money has two values: a time value and a risk value and any risky asset or investment must provide the investor with returns for the time his/her money is tied up in the investment and for the investment’s relative riskiness. This compensation must be in addition to the risk free rate of return. As outlined in appendix ( ), the CAPM for Sprint during the period of the analysis for this paper was .534.
STOCK ANALYSISAccording to the stock analysis report on Yahoo Finance, since December 2008, the company’s stock price has increased by 378% from $1.83 to its current price of 6.92. When you look at the Sprint’s financials in its 2012 10K report, the thing that stands out is that for FY2012 the company’s P/E (Price divided by Equity) is nil. This is because Sprint has recorded a negative EPS and P/E ratio for five consecutive years. Sprint’s BETA is also 1.22 which shows that it is a volatile stock.
INTRINSIC VALUEThe value of a security, justified by factors such as assets, dividends, earnings, and management quality. Intrinsic value is at the core of fundamental analysis since it is used in an attempt to calculate the value for an individual stock and then compare it with the market price. From the calculations completed, Sprint’s intrinsic value is somewhere around $8.84. This is above to Sprint’s current stock price of $6.97. This means that the current stock price is trading below the value of the assets ($51.5B) owned by Sprint.
RECOMMENDATIONSprint’s price ratio combined with its fundamental and technical analysis reveal that the stock does not provide much value to investors at this time. Some might consider the stock a good sell or “short” and Options traders may want to place a few puts on the stock.
However, if you would like to diversify your portfolio, and the telecoms industry in a serious option, then it is recommended that investor stick with the 5% dividend yields, 4G spectrum dominance, and future growth opportunities that Verizon or AT&T offer. Since Sprint has not paid out any dividends for the last 5 years coupled with the poor financial performance of the company, I would not recommend Sprint as an investment at this time. The recommendation would be to wait until all the changes have taken place as a result of the merger with Softbank and US Cellular.
REFERENCEBodie Z., Kane A., Marcus A., (2010) Essentials of Investments. New York. McGraw-Hill/Irwin. Stock Report on Sprint Stocks. (2013, June 20) Retrieved from http://finance.yahoo.com/q/hp?s=S&a=11&b=31&c=2008&d=11&e=31&f=2013&g=m United States Securities and Exchange Commission. (2012)Washington D.C. Sprint 10K Report.
Retrieved from http://www.sec.gov/Archives/edgar/data/101830/000010183013000006/sprint201210-k.htm United States Securities and Exchange Commission. (2012)Washington D.C. AT&T 10K Report. Retrieved from http://www.sec.gov/Archives/edgar/data/101830/000010183013000006/sprint201210-k.htm United States Securities and Exchange Commission. (2012)Washington D.C. Verizon 10K Report.
Retrieved from http://www.sec.gov/Archives/edgar/data/101830/000010183013000006/sprint201210-k.htm Zack Investment Research (May 22, 2013). Retrieved from http://www.zacks.com/ Financial Ratios. (June 20,2013) Retrieved from http://www.investopedia.com/university/ratios Sprint Nextel Corp. (S) Fundamental Analysis. (October 2012). Capital Club. Retrieved from http://www.insidermonkey.com/blog/sprint-nextel-corp-s-fundamental