Sprint Points to Higher Investment in Network Improvement

Sprint ( S ) primarily competes with AT&T ( T ) and Verizon ( VZ ) 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 $5.15 . 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 follow.

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 stock value.

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 to our $5.15 price estimate.

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.

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

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

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