Sprint Investing in Network Modernization, Upside Potential to Stock

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Sprint ( S ) competes primarily with AT&T ( T ) and Verizon ( VZ ) in mobile business. The company is looking to modernize its network so as to add flexibility to add LTE services in the future and migrate iDEN subscriber base to CDMA network. Additionally the company also plans to decrease the number of its cell sites from around 66,000 to 46,000 in the U.S.

We have written an article previously ( Can New Push-to-Talk Initiative Lift Sprint's Stock? ) wherein we described how iDEN migration to CDMA could help Sprint and potentially lift our estimates.

Our current price estimate for Sprint is $4.35, which is around 5% ahead of the current market price.

An industry analyst recently estimated that Sprint could also potentially save $2 billion annually as a result of lesser maintenance and roaming costs.

So what do $2 billion of annual savings mean for Sprint's stock? The modernization project is expected to last till 2014 after which the complete benefits will be visible. Thus we assume that from 2014 and beyond, Sprint will be able to increase its wireless gross profits by approximately $2 billion as suggested by the analyst.

Gross margins can improve, SG&A stays put

To realize savings of $2 billion annually or to increase gross profits by equal amount, Sprint will need to increase its mobile plans gross margins and mobile internet gross margins to approximately 73% by end of 2014. These are essentially gross margins for the company's wireless services.

In our estimates we include SG&A as % of gross profits as a driver and so increased gross profits would typically imply a higher amount of SG&A. We want to remove this from the analysis here since additional savings are a result of investment in the network and thus SG&A as % of gross profits will go down.

Accounting for increased taxes and the potential additional capital expenditures (apart from what we forecast), the above adjustments could lead to upside of close to 30% to 35% to our price estimate. Does this mean Sprint is an attractive stock right now?

We believe that investors are likely to remain cautious until Sprint actually demonstrates cost benefits and improved subscriber additions as a result of the project.As this scenario reflects the potential impact if the costs savings from this investment, we await further data or announcements from the company on its capital expenditures and to see if some gross margin impact is taking place due to the modernization project.

You can see the complete $4.35 Trefis price estimate for Sprint's stock here .



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 , Investing Ideas , Stocks , US Markets

Referenced Stocks: S , T , VZ

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