09/20/2017

Why We Like Sprint Corp (NYSE:S)

Overview: Sprint Corp (NYSE:S) is one of the 4 big wireline and wireless communication providers in the United States. Its “services are provided through our ownership of extensive wireless networks, an all-digital global wireline network and a Tier 1 Internet backbone.” The company offers “wireless and wireline services to subscribers in all 50 states, Puerto Rico, and the U.S. Virgin Islands under the Sprint corporate brand, which includes our retail brands of Sprint®, Boost Mobile®, Virgin Mobile®, and Assurance Wireless®”.  Sprint is majority owned by Softbank Group of Japan, which owned 83% of the outstanding common stock of Sprint Corporation as of March 31, 2017.  Sprint for the year ending March 31, 2017 – derives majority of its revenue and earnings from its wireless business – US$ 23.8 B in segment sales and US$ 9.8B in segment earnings vs. US$2.0 B in segment sales and US$ 0.119B in segment earnings for its wireline business. The company had 59.7 Million subscribers on its network of which 31.6M were postpaid customers, 12M prepaid customers and 16.1M subscribers through the wholesale and affiliates program. The 59.7M subscriber count puts Sprint at the bottom of the big 4 – Verizon has 146 M, AT&T has 134.2 M and T-Mobile has 72.6 M.  The company also has had one of the higher churn rates (Churn measures the number of connections that are disconnected from mobile wireless service during a given period time period, and is usually expressed as a percentage) – historically measuring approximately 2.5% vs competitors having less than 2% (Verizon at 1.2%).  The reason for the high churn was that Sprint had cobbled up lots of spectrum through time, especially through its acquisition of Nextel, but did not do a good job investing in optimizing its network as they had less capital available due to their high debt levels ($40B currently). Over the last couple of years, the company has spent time and capital to better densify and optimize its network. Though the top line hasn’t improved much, the company has improved its margins by lowering the cost structure.  The company believes it is well-positioned with spectrum holdings of more than 160 MHz of 2.5 GHz spectrum in the top 100 markets in the U.S. While the company’s network can reach 300 million people in the US  (compared to 314 million for Verizon & T-Mobile) and it has good spectrum holdings, the company still does not have all the capital equipment and backhaul network to fully optimize the network.  Though there are only 4 primary service providers in the wireless arena (Sprint, Verizon, AT&T, and T-Mobile), the industry has gotten very competitive as more MVNO (Mobile Virtual Network Operator) have entered the market.  MVNO’s are service providers that enter into a business agreement with a mobile network operator(s) to obtain bulk access to network services at wholesale rates, then set retail prices independently. Google Fi, Straight Talk, Lyca Mobile and Ultra Mobile are examples of a few MVNO’s.

Catalyst: The catalyst for Sprint is that 2 new big MVNO’s are looking into using Sprint. Comcast & Charter Communications, two of the biggest cable providers in the US are evaluating to see if they should utilize Sprint’s network for the wireless service they want to offer to their subscribers. Currently both Comcast & Charter have an agreement with Verizon Wireless that allows them to use Verizon’s network for their MVNO. They received that right when they sold spectrum holdings they had to Verizon a few years ago. Though they have the right to utilize Verizon’s network, they still need to pay Verizon appropriately which is potentially more expensive than using Sprint’s network.  Comcast & Charter Communication also have an agreement that neither party can negotiate with another wireless provider independently for the next year so any agreement signed this year would be signed jointly by both parties.  It was also disclosed recently that the 2 companies and Sprint signed a document giving them an exclusive right to negotiate with Sprint until end of July. If they choose, they can work with Sprint in multiple ways – 1. they could outright buy the company; 2. infuse capital for a partial stake; 3. allow Sprint to use their fiber network in exchange for a lower price; 4. do nothing. Comcast & Charter could be using Sprint as a foil in their negotiation with Verizon so nothing might come from the negotiations.  However, Sprint shares should increase if they do any joint offering as it will either help reduce debt and/or improve cash flow.  Sprint has also been in discussions with T-Mobile about a potential merger, though that was put on hold due to the Comcast negotiations. Though Sprint and its majority shareholder would like it very much, the question is will the combined company have too much debt and will the regulators allow the merger – regulators previously disallowed the T-Mobile and AT&T merger.

Modeling in 3% growth and slightly improving margins with no real growth in invested capital, we see the company’s share price increase if the uncertainty of high leverage is lessened.