) gross margins have suffered in recent years falling from 75%
in 2006 to around 67.5% in 2009. We believe this is due to a
decline in Sprint's subscriber base and the use of promotional
activities in an effort to retain clients.
Sprint competes primarily with other telecom providers
like Verizon (
) and AT&T (
) in the wireless business. These two companies have enjoyed
subscriber gains over past few years at Sprint's expense, and we
believe this is due to: 1) Sprint's poor brand image vis-a-vis its
peers, and 2) an inferior smartphone product offering causing it to
lose subscribers to other networks.
However, Sprint appears to be righting itself with a first class
smartphone offering and more focus on brand improvement. We believe
these changes should lead to higher gross margins, which is the
biggest driver for
our current price estimate of $4.35
, which is about 8% above its current market price.
Improving its Brand Image
Sprint's brand image has improved in recent quarters along with
improvements in customer satisfaction, according to a J.D. Power
& Associates survey on network and customer service. Postpaid
subscriber additions were 354,000 in Q3 2010 and positive for the
4th consecutive quarter.
With an improving image and customer experience, Sprint will
continue to see subscriber additions and can shift away from costly
promotional offers that tend to put pressure on margins.
Upgrading its Smartphone Lineup
Sprint is making efforts to improve its smartphone lineup to
bring it on par with its rivals like AT&T and Verizon.
According to the company, its Samsung Epic 4G (launched in Q3 2010)
and HTC EVO (launched in Q2 2010) are the two best rated
smartphones on the market in PCWorld's rankings, ranking ahead of
the iPhone 4 and Android based device.
This strategy is paying dividends as 60% of the company's mobile
phone sales and upgrades in Q3 2010 were smartphones. (See
mobile plan gross margin
mobile internet gross margin
Higher Margins Can Lift Sprint's Stock
While we currently forecast that Sprint's wireless gross margins
will remain under pressure in the near term and stabilize around
66%, we believe that Sprint is showing positive improvements that
could lead us to upgrade our estimates.
For instance if gross margins grow to 70% by end the of our
forecast period, we see an additional 12% upside to our price
You can modify our forecasts above to see how wireless gross
margins can impact Sprint's stock.
You can see
the complete $4.35 Trefis price estimate for
Sprint's stock here.