is not for the faint of heart. If you get it wrong, then you could
lose a lot of money quite quickly. That's because a heavy short
interest can lead to a
that adds unwitting buying pressure. And this may be precisely what
happened to wireless services provider
Back in mid-May,
"Sprint's recent quarterly results showed clear signs of a company
getting healthier, most notably in the area of average revenue per
user and further solid numbers in the second quarter may just be
too much for short-sellers to
Well, that has indeed been the case, and this stock is now up
roughly 60% since then. Remarkably, the short sellers appear not to
have seen it coming. As of July 13, the short position had risen to
, up from 139 million when I looked at this stock in May.
Presumably, some of those shorts sought to cover their bad bets
when solid second-quarter results came out on July 26. But the
short sellers that are standing firm may be in for more pain, as
this stock could rise to $6 (or another 50% from here).
In short, this company is morphing from being a clear industry
to one that is beginning to deliver operating metrics in line with
the industry's top players. Management, which had laid out lofty
plans to upgrade the company's network, has thus far delivered on
its goals: shut down the disappointing Nextel network on a timely
basis, boost the amount that subscriber's pay, and reduce monthly
A quick look at second-quarter numbers tells the story:
- Sprint's network is no longer being plagued by dropped calls
and other glitches, so customers are staying put. The churn rate
(for post-paid subscribers) dropped to an all-time low of just
1.69%. Lower churn means higher subscriber counts, which have now
risen for nine straight quarters (among post-paid
- The ongoing migration to smart phones -- led by the iPhone --
is leading to more data-plan subscriptions, enabling Sprint to
average revenue per user (ARPU)
above $63 -- 16% higher than a year ago. This in turn fueled
for the wireless segment of $1.3 billion -- 40% ahead of
- Sprint is managing a period of heavy spending quite well: the
company's Network Vision upgrade, which is aimed at providing
nationwide 4G and 4G LTE services (and improved voice quality)
has progressed with few hitches while the company also shuts down
(or transitions) Nextel cell sites. Even with that massive
), management is increasingly confident that Sprint's
can support the spending now, setting the stage for solid
free cash flow
growth in 2013 and beyond.
- Thanks to recent balance sheet moves, Sprint now only has
coming due by the end of next year, which can be handled with
current cash levels.
It's that last point short sellers need to think about. Many had
assumed Sprint would face some sort of liquidity crunch to meet its
Capex needs, leading to possible painful
for shareholders. Now, it no longer appears to be the case.
To be sure, Sprint will need to come up with $1.35 billion in
2014 to pay off bonds that are coming due, but the company's
financial picture is getting strong enough to enable Sprint to
issue new bonds to cover that debt. Moreover, improving fiscal
health implies that Sprint's
cost of capital
could drop, meaning the company will be able to replace high-price
debt with lower-cost debt as time progresses.
A settlement still in the works…
What about that $100 million
lawsuit with the state of New York I discussed in May? Well, the
company had nothing to say in its prepared comments on the
, nor did any analysts bring up the topic. Presumably, talks
continue, and this still stands out as a risk for the stock, should
any legal ruling prove onerous.
Analysts, many of which had been cool to Sprint, havebeen
warming up to the stock: Citigroup was already a fan, and maintains
; Analysts at UBS hiked their price target from $2.50 to $6, noting
thanks to a "significant increase in our outlook for EBITDA and
over the next 3 years." Analysts at JP Morgan also went to a $6
price target (from an undisclosed prior target), citing the fact
that "Network Vision is progressing on schedule and management
expects ~$300m less dilution in 2012 adj. EBITDA vs. the $1.1b Oct.
2011 guidance." And analysts at Credit Suisse reiterated a $6 price
target, predicting that Sprint will likely generate $8 billion by
All of these analysts have the same price target, which may be a
serious case of groupthink. But each arrives at that target using
different methodology, which should give existing short sellers
something more to think about.
Risks to Consider:
A short squeeze may have helped to fuel big gains this week,
and if that process is complete for now, then shares may pull back
a bit in the next few trading sessions as long-oriented investors
book profits. Also, the outcome of the lawsuit still stands out as
a risk for the stock, as I said earlier.
Action to Take -->
Sprint is in a clear transition from poorly run to well run. The
company's key financial metrics are good and improving. Few would
have predicted that from this perennial laggard a few years ago.
Credit goes to
Dan Hesse, who took ample abuse when Sprint was struggling but is
now in contention for "comeback CEO of the year." As investors
reframe their view, shares should keep appreciating.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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