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Sprint (S): S&P Slashes Credit Rating; Stock Plummets

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Standard & Poor's (S&P) Ratings Services has downgraded Sprint Corp. 's S already junk-rated debt to "B" from "B+". Following the credit rating cut, the company's shares lost nearly 10% in yesterday's trading session.

Why the Downgrade?

S&P cited two major reasons - intense competition and a challenging environment in the wireless industry - behind the credit rating downgrade.

According to the rating agency, improvement in Sprint's longer-term liquidity position looks dicey as Sprint will be tested to effectively grow its subscriber base and reverse negative free operating cash flow trends.

As the U.S. boasts a high rate (95%) of wireless penetration, competition is intense. This, in turn, is exerting immense pressure on both the top and the bottom line of carriers vying for market share.

This is evident from Sprint's fiscal 2015 third-quarter performance, wherein total revenue of $8,107 million was down 9.7% year over year. In the quarter, total retail prepaid churn rate was 5.82% compared with 3.94% in the prior-year quarter. Moreover, its third-quarter free cash flow was a negative $797 million.

Meanwhile, in Sep 2015, credit rating agency Moody's Investor Service also downgraded Sprint's credit rating to B3 from B1, or six levels below investment-grade citing excessive pressure from intensifying competition.

Competition Rife

Despite retarding wireless subscriber growth, U.S. telecom behemoths AT&T, Inc. T and Verizon Communications Inc. VZ are far ahead of Sprint in terms of scalability, network quality and product diversification. To add to its woes, T-Mobile US, Inc. TMUS has caught up with Sprint in terms of subscriber gain by offering several low-priced plans.

On the other hand, Sprint has been losing customers for quite some time now and has been trying all means to make a turnaround to keep up with its competitors in the industry.

In particular, the company has been resorting to heavy promotional activity to entice customers and broaden its subscriber base.

However, Sprint's aggressive competitive strategy has its own perils. From current standards, Sprint is severely cash strapped. The company has a debt-laden balance sheet and negative operating cash flow. Further, the company's financials may take a severe hit as these promotional strategies are likely to impact its wireless segment EBITDA and EBITDA service margins in the near term, anticipating an increase in expenses.

All is Not Lost

All is not lost for Sprint as S&P has assigned a stable outlook on the rating, noting that the company has made somewhat improvements in areas like subscriber gains. Further, the rating agency believes that the company's cost reduction effort will provide it with some much-needed stability in the near term.

Only recently, popular technology site Re/code reported that Sprint has finalized its cost cutting framework with an expectation to save around $1 billion. The plan involves a few operational overhaul and layoffs.

Our Take

Financial strength and credit ratings, intended at measuring a company's ability to meet policyholder obligations, are important factors affecting public confidence and creditworthiness of a company, and hence its competitiveness.

In this regard, the latest credit rating cut is definitely a setback for the carrier who is leaving no stone unturned to regain its financial footing.

Nonetheless, we believe Sprint's earnest efforts to boost its earnings going ahead through strategies like operating costs reduction should bear fruit and lend confidence to its stakeholders.

Sprint currently has a Zacks Rank #2 (Buy).

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AT&T INC (T): Free Stock Analysis Report

SPRINT CORP (S): Free Stock Analysis Report

VERIZON COMM (VZ): Free Stock Analysis Report

T-MOBILE US INC (TMUS): Free Stock Analysis Report

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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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