Let me see if I have this right: On Wednesday, after the announcement that Deutsche Telekom (PINK:DTEGY), owner of U.S. wireless carrier T-Mobile USA, is in talks to acquire MetroPCS Communications (NYSE:PCS), perennial third-place carrier and InvestorPlace Real America Index component Sprint (NYSE:S) rose more than 6%.
Then Thursday morning, after a downgrade from analysts at Robert W. Baird, those same Sprint shares — which by the way are up over 117% year-to-date — traded down as much as 5% before recovering a bit into the close.
As Vince Lombardi once famously exclaimed: “What the hell is going on here?”
Indeed, Sprint’s rapid rise so far this year is slightly mystifying, as the company doesn’t seem to trade on any kind of fundamental basis, and for every “downgrade” it appears someone else has a differing opinion. In short, verdicts are decidedly split:
- Macquarie: Rated “outperform”
- FBR Capital (NASDAQ:FBRC): Price target raised to $7 per share
- Raymond James (NYSE:RJF): Moved from “outperform” to “market perform”
- Bank of America (NYSE:BAC): “Buy” rating reaffirmed
So seriously, what gives?
Let’s start with the following premise: Sprint is the No. 3 carrier in the U.S., well behind AT&T (NYSE:T) and Verizon (NYSE:VZ). Taken together, this duopoly controls nearly 200 million customers, or more than their next six competitors combined. These two have such large leads that it will be virtually impossible (my mom told me, “never say never”) for any chaser to catch them. Period.
With nearly 56 million subscribers, Sprint is nearly 14 million ahead of whatever the merged MobilePCS/Deutsche Telekom entity calls itself. Perhaps this isn’t quite as big a lead as AT&T and Verizon have over Sprint, but it’s a darn good head start. So it’s fairly safe to say that Sprint is locked in to a No. 3 position in the industry for the time being, particularly since T-Mobile does not carry Apple‘s (NASDAQ:AAPL) iPhone.
As the No. 3 player, perhaps the best Sprint can hope for is continued modest growth based on either establishing a stronger market presence with its 4G LTE network, although that effort is, like subscriber base, well behind AT&T and Verizon. Alternatively the company can try to give away the store with subsidies and low-cost pricing models in an effort to woo new customers away from the competition.
Of course the problem there is the company is bleeding all over itself, having lost money in the past 19 consecutive quarters — to the tune of roughly $50 billion.
Perhaps the biggest contributor to those losses was the ill-advised and ill-fated purchase of Nextel back in 2007; the merger was a disaster on every level, with Sprint forced to support two different models and platforms. To end the madness, the company announced the marriage will be dissolved effective June 30, 2013.
Sprint does have $6 billion in cash on hand, but it also owes $16 billion in debt, more than its market capitalization.The good news? Thanks to a big buildup and payout of capital expenditures, massive non-cash depreciation allows Sprint to show positive free cash flow.
Which brings me to why it’s possible for at least some analysts to suggest optimism for the company — and thus a higher stock price.
First of all, ending the Nextel debacle may unlock more potential as those customers migrate over to Sprint. History suggests that has not happened yet, but hey, that’s why it’s called optimism. If nothing else, the drag of carrying that network and those customers will end.
Second, perhaps Sprint will finally find some partner (or be purchased) to bring along newer technologies or another set of customers. Who might that be?
Well, only AT&T and Verizon have the kind of money and cash flow to buy Sprint, and I suspect antitrust considerations would terrify both away from even considering such action. (Of course, AT&T would probably just as soon see Sprint drown after Sprint killed an AT&T merger with T-Mobile.)
As for new technologies, the name Leap Wireless (NASDAQ:LEAP) keeps leaping up in telecom merger talks, but nothing seems to come of those talks. I have no idea where Sprint would even get the money to take a run at an acquisition, so options on that front appear limited as well.
So I guess I have no answer to my original question: What the hell is going on to have made this stock more than double since January? I mean, is third place worth that much?
In Glengarry Glen Ross, third place gets you … fired.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long VZ.