Pulling a page out of the recent Donald Trump rebranding campaign, Sprint Corp (S) will expand its premium-level LTE Plus network to 191 cities, including the lucrative New York City market.
Sprint claims that the LTE Plus will double internet connection speeds. Slow speeds have been a thorn in the company’s side for a while, however, critics are concerned that it’s a case of too little, too late.
The bearish argument is so overwhelming, it’s almost patronizing to list them all. Of primary concern for Sprint stock holders is that the network carrier hasn’t posted a profit in almost ten years. Annual revenues have also flatlined over the past nine years.
Based on the outflow of cash due to capital expenditures and overhead costs, it’s clear that management’s priorities are not necessarily in tune with those of S stock buyers. That, however, is guaranteed to change.
Sprint Stock: Digging a Hole or Making a Moat?
In the past seven years, Sprint has lost millions of customers to rival U.S. wireless carriers Verizon Communications Inc. (VZ), AT&T Inc. (T) and, especially, T-Mobile US Inc (TMUS). While the company hasn’t slacked in its marketing efforts, the results have been lackluster.
Perhaps this year more than any other is where the writing on the wall is most apparent. Shares of VZ, T, and TMUS have an average year-to-date performance of 8.5%. S stock, on the other hand, is well below the curve at 4%.
There’s no doubt that customer outreaches — such as the 2014 “iPhone for Life” promotion that was timed with the release of the iPhone 6 from Apple Inc. (AAPL) — have contributed to improvements in subscriber retention. At the same time, all of these efforts cost money. Rising debt levels have forced Sprint into making creative arrangements to raise capital. It’s one area among many in which the mobile carrier is found lacking.
In response, Wall Street has a pretty dim view when it comes to Sprint’s earnings potential. For its upcoming fourth quarter of fiscal year 2016 release, the consensus calls for earnings per share to hit a 12-cent loss. That’s double the pessimism from the year-ago quarter!
To put that into perspective, S stock was up roughly 21% YTD heading into Q4 FY2015 earnings. This time around, Sprint stock has neither technical nor fundamental tailwinds to offer a modest push forward.
Yet, it’s clear that Sprint stock has buyers. Since plunging toward penny-stock obscurity earlier this year, Sprint clawed its way to a 50% gain in the markets. Believe it or not, there is a contrarian play here. At last count, the short interest for shares of Sprint fall just shy of 27%. That’s very close to an all-time record. Due to the buyback nature of exiting a short position, any bit of positive news could lead to a burst in price action.
Also, there’s a seasonal quality to Sprint’s stock performance. Since January 2010, shares of Sprint have produced monthly returns averaging 2.5% in the first half of the year. In the second half, however, that figure drops to a 1% loss. In addition, May statistically happens to be the third-best performing month for Sprint stock, with returns averaging 6% in the past six years.
Seasonal odds shift to the negative in June. By July, Sprint stock has a tendency of turning into a basket case, with average losses of 6%. Theoretically, swing traders can use this information to their advantage. The first half tends to favor the bulls, so traders should hedge against downside volatility. The second half is comparatively more bearish, so “upside risk” is the primary focus.
At this point, short-term trading is the only practical way to approach Sprint stock. Otherwise, the company is flirting with disaster. Its profitability margins are terrible and programs to improve sales would likely exacerbate this trend. Sprint is also burning through cash, which makes its liabilities all the more conspicuous.
Finally, the carrier’s price-to-book ratio is 73 cents to the dollar compared to the industry median of 2.18. Translation: you can’t pay most people to buy Sprint stock.
The telecommunications industry has suffered tremendous difficulties in recent years. That said, Sprint is an obvious laggard in an environment that is increasingly competitive. The catch-22 is that an effort to improve one area of its game necessarily sacrifices a different area. The only real constant is its ever-declining share price.
And while Sprint does have some redeemable qualities, investing in Sprint requires an undue amount of care and oversight to realize the potential. For most investors, the only right price for Sprint stock is no price at all.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
