) primarily competes with AT&T (
) and Verizon (
) in the mobile business. The company recently released its Q4
2010 earnings and, based on continued improvement in subscriber
trends and a more optimistic margin outlook, we have updated our
price estimate for Sprint's stock to
. The mobile business notably constitutes close to 79% of our price
estimate, which stands at a premium to market price.
It is interesting to note that Sprint recorded overall positive
postpaid net additions for the first time in a few years during the
most recent quarter. This implies that CDMA postpaid subscriber
additions more than compensated for loss in postpaid iDEN
subscribers, as postpaid net adds increased 58,000. The CDMA
platform added about 453,000 subscribers in the quarter while iDEN
lost about 395,000.
This result is due to improvement in both network and customer
service, and we anticipate that Sprint will continue to build on
this trend. The company plans to beef up its capital spending and
expects cost savings and customer experience improvement to
Network Improvement and Margin Outlook
Sprint has announced a significant increase in capital
expenditures for 2011 in order to improve its network. After
recording close to $1.9 billion in capital spending in 2010, Sprint
plans to spend about $3 billion in 2011 under the Network Vision
program that aims to improve the network and increase data
capacity. Consequently, we expect the spike in capital expenditures
to be sustained for some time as the company's network improvement
initiative will likely last several years.
However, if Sprint can achieve its network improvements prior to
2015, and its spending levels subsequently drop, the company's
value could get a significant lift. Sprint's stock is very
sensitive to this driver given the high degree of leverage employed
by the company.
See our full analysis and $5.15 price
estimate for Sprint
The modifiable chart above details how changes in capital
spending within Sprint's mobile segment can affect the company's
How might this additional spending play out? Besides aiding
subscriber additions, Sprint will likely witness cost savings and
growth in gross margins. The company anticipates significant margin
improvement post 2013.
We forecast improvement in Sprint's mobile division gross
margins over our forecast period. If Sprint can get these margins
back to its 2006 historical peak, it would imply roughly 15% upside
The chart below illustrates how various scenarios for Sprint's
mobile plans & phones gross margin can affect the company's
stock value. We note that this metric also affects Sprint's mobile
internet business division.