When Sprint (NYSE: S ) executives sat down with investors and analysts last
Friday, the news sounded pretty good: The carrier will start offering wireless
4G LTE service in the middle of 2012 and will finish building out its new
network by the end of the following year. At first, the stock rallied 12% on the
news. LTE is a version of next-generation 4G mobile networks, with the potential
to work several times faster than the 3G networks now in use. Sprint offers a 4G
service that relies on the Wimax technology of its partner Clearwire (NASDAQ:
CLWR ), but the extra investment would allow Sprint to rely more on its own
spectrum and less on Clearwires. Then came the bad news, and for investors it
far outweighed the good: Sprint said the network buildout would require $10
billion in capital expenses over the next two years. To raise that money, Sprint
would have to sell new shares – diluting the stakes of existing investors –
or take on new debt. Things got ugly fast. Within minutes, that 12% rise
vanished and Sprints stock sank for the rest of the day. On Monday, it continued
to sink as analysts furrowed their brows, wagged their fingers and revised their
estimates. At Mondays close, Sprint had lost 26% of the market value it had
before it made its announcement. For good measure, Clearwire, the partner Sprint
was throwing under the bus to build its own costly network, lost 37% of its
value in the same two-day period. It wasnt supposed to happen like this.
According to a report that appeared only a week earlier, Sprint was planning to
launch its LTE network in "early 2012" with no additional costs: "With the
costs already accounted for in its prior forecast, the LTE network wont require
any additional capital investment," CNET reported on Sept. 27. In late August,
Sprints CEO told Engadget he had a " great story around 4G " to tell this
fall. So far, only the Sprint bears are enjoying the story. Some analysts
attending the event werent so excited. The need to raise capital was bad enough,
but Sprint dodged questions about their own sales of Apple's (NASDAQ: AAPL )
iPhone or earnings forecasts. " Sprint is un-investible until they can provide
better clarity on EBTIDA, their 4G strategy and their capital structure,"
wrote Walter Piecyk of BTIG in a huffy note, which pointed out that Sprint had
dodged similar questions before, saying it would address them at last Fridays
event. The iPhone issue is also a sticky one. Carriers like AT&T (NYSE: T ) and
Verizon (NYSE: VZ ) saw their margins slim down after they began selling
iPhones, because of subsidies that carriers pay to sign up new subscribers. The
profit margin will increase over time, but in Sprints case the short-term profit
hit will coincide with the networks higher capital spending. Piecyks note came
on Friday. On Monday, things only got worse as six research houses downgraded
the stock, including Deutsche Bank, JP Morgan and Kaufman Brothers. JPMs Philip
Cusick said the companys executive team "needs to re-prove itself to investors
before the stock can work." And not just to investors Standard & Poors warned
that it may downgrade the companys credit rating. The cocktail of lower margins
from iPhone subsidies and the new costs of upgrading its networks may be too
powerful for Sprint to stomach. Or as S&P put it, the mix "could lead to
near-term deterioration of profitability and key credit measures in the next few
years, including higher leverage and negative free operating cash flow in 2012
and 2013." Sprint is now worth a little more than a third (37%) than it was
only four months ago. Some contrarian-minded investors might imagine the stock
has been beaten down so hard that it could be a bargain, given the chance for
long-term growth thanks to iPhones and that new 4G network. But they might
consider that Sprint has $16 billion in long-term debt, several billion of which
will come due in the next few years. These risky bets the company is making
could hurt cash flows, which would making debt repayment tougher, as well as
hurt its credit rating, which would make interest payments higher. At the very
least, Sprints race to profit growth wont involve a sprint anymore. Its looking
more like a marathon.
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