) competes primarily with AT&T (
) and Verizon (
) 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
) wherein we described how iDEN migration to CDMA could help Sprint
and potentially lift our estimates.
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
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
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
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
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