Earnings Preview: Sprint Nextel - Analyst Blog

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The third-largest U.S. wireless carrier Sprint Nextel Corp. ( S ) is slated to release its fourth quarter and fiscal 2011 earnings on February 8, before the opening bell. The current Zacks Consensus Estimate for the fourth quarter is pegged at a loss of 38 cents, representing a year-over-year decline of 30.46%.

For fiscal 2011, the Zacks Consensus Estimate is 90 cents, representing a year-over-year increase of 22.92%.

Looking at surprises, Sprint had average positive surprise of 45.46% in the past four quarters. Hence, we will not be surprised if the carrier beats expectations in fourth quarter 2011, attributable to increased penetration of smartphones, especially Apple Inc. 's ( AAPL ) iPhones, which Sprint started to sell in mid-October. In addition, rising average revenue per user (ARPU) and lower churn in the post-paid wireless segment are also expected to contribute strong growth. However, iPhone subsidies and funding issues might weigh on the fourth quarter results.

In the third quarter conference call, management expects post-paid and total wireless subscriber additions to improve in fiscal 2011. Additionally, Sprint Nextel projects s capital expenditure of approximately $3 billion and free cash flow between negative $200 million and positive $100 million for fiscal 2011.

Third Quarter Flashback

In the third quarter, Sprint's adjusted net loss narrowed from the Zacks Consensus Estimate and the year-ago earnings. Revenue improved from the year-ago level driven by strong post-paid ARPU and healthy prepaid subscriber additions, but fell short of the Zacks Consensus Estimate.

Wireless revenue improved on the heels of best wireless net subscriber addition in the last five years and lower churn (customer switch). Wireline revenue, which was impacted by declining traditional voice access lines, was a spoiler in the quarter.

Agreement of Analysts

Estimates have been trending upward for both the fourth quarter and fiscal 2011 over the last 7 and 30 days.

For the fourth quarter, 4 and 1 out of 24 analysts made upward revisions in the last 30 and 7 days, respectively. Downward revisions were made by 3 analysts in the last 30 days and none in the last 7 days.

For fiscal 2011, out of the 27 analysts, 4 and 1 made upward revisions in the last 30 and 7 days, respectively. 3 analysts revised estimates downward in the last 30 days and none in the last 7 days.

After focusing on cost containment and business stabilization for several years, the analysts believe Sprint is slowly turning around its post-paid wireless business. Despite the hefty iPhone subsidies, the analysts expect Sprint to have strong prospects in the wireless market and may boost revenues and profits. The iPhones and LTE upgrades along with attractive product and service offerings as well as prepaid brands like Boost Mobile, Assurance Wireless and Virgin Mobile would boost Sprint's wireless growth prospects. With respect to the rapid growth of 4G Long-Term Evolution (LTE) service offerings, Sprint plans to launch its own LTE networks in the 1.9 GHz band in mid 2012 and expects to complete the deployment by year-end 2013.

Further, the company continues to benefit from the Network Vision plan, which is ahead of its original schedule. Network Vision will likely generate $10 billion to $11 billion in savings over the next seven years (2011-2017). Additionally, Sprint's OBITDA margin is expected to grow by 800-1200 bps by the end of 2014.

Nevertheless, the Network Vision plan and the iPhone subsidies are expected to pressure margins and dilute Sprint's free cash flow. As a result, Sprint needs to raise $5 billion to $7 billion funds over the next two years to address its 4G network upgrade, iPhone subsidies and debt maturities as well as maintain cash balance target of $2 billion.

Magnitude - Consensus Estimate Trend

The magnitude of the fourth quarter estimate revisions remained unchanged at a loss of 38 cents over the last 7 days but was up a penny over the last 30 days.

The Zacks Consensus Estimate of $2.24 for fiscal 2011 remained static over the last 30 days.

Our Recommendation

We believe Sprint has managed to taper its losses on the back of strong wireless business with reduced churn, improved ARPU, increased penetration of handsets, advanced product and service offerings and unlimited data plans. With the recent launch of iPhone 4 and iPhone 4S coupled with the Network Vision plan, the company is expected to register new highs in its wireless business given the growing demand for new age devices.

Nevertheless, increased competition, heavy investments, funding issues, iPhone subsidy continued wireline margin pressure, and stiff competition from Verizon Communications Inc. ( VZ ) and AT&T Inc. ( T ) keep us cautious on the stock.

We are currently maintaining our long-term Neutral recommendation on Sprint. The stock retains a Zacks #3 (Hold) Rank for the short term (1-3 months).


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: AAPL , S , T , VZ

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