Sprint Corp (S) Improves, But Don’t Celebrate Sprint Stock Just Yet

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Sprint Corp (S) stock is up more than 3% in response to fiscal fourth-quarter and full-year earnings, and considering the losses in equity markets, that’s a positive reaction.

Sprint Corp (S) Improves, But Don't Celebrate Sprint Stock Just YetClearly, investors are celebrating major improvements, such as operating income and wireless gains. However, before celebrating, there are a few things you must consider.

What to Consider With S Stock

What impressed me most was Sprint’s improvement in operating income. It improved to $310 million for the full-year versus a loss of $1.9 billion the year prior. For the coming year, Sprint expects operating income to be somewhere between $1 billion and $1.5 billion. Hence, this is one area of Sprint’s business that is showing major improvements, and so long as Sprint can reduce capital expenditures — Sprint vows to reduce costs by $2 billion this year — then the company should theoretically turn profitable in the foreseeable future.

Theoretically, the above makes sense, and is what Sprint is trying to sell. However, Sprint is still a ways off.

Sprint spent nearly $7 billion on capital expenditures related to its network ($4.68 billion) and leased devices ($2.29 billion) last year. That’s nearly $1 billion more than Sprint spent the year prior! Yet, if you read Sprint’s earning release, all you see is talks of lower costs, improved free cash flow on an “adjusted” basis, and plans for “adjusted” free cash flow to be near positive over the next year.

Clearly, if a company has nearly $6 billion in capital expenditures related to leased devices and network improvements, coupled with just $310 million in operating income, it is nowhere near positive or flat free cash flow.

Note: free cash flow is defined as operating income minus capital expenditures.

Be Wary of Owning Sprint Stock

That said, Sprint’s earnings look better on paper because its parent company, Softbank, formed two financing vehicles to fund some of Sprint’s network and leasing expenses. As a result, the costs don’t look quite as bad on paper, the debt increase stays in check and shareholder sentiment rises.

Honestly, it was a wise move by Sprint and Softbank … not sure about the third-party creditors who are funding this mess though.

Nevertheless, off-balance-sheet debt is still debt, and at some point, must be paid back or Sprint defaults on its obligations. While the market seems to think that the chances of a default are decreasing, the risk is likely rising with each and every quarter of negative free cash flow. As explained in a previous article, Sprint’s balance sheet may show a specific number as its net debt — in this case it is $31.3 billion — but Sprint has another $17 billion in off-balance-sheet debt that it will eventually have to pay off.

At the end of the day, Sprint stock is still a very dangerous investment. Sure, I admit there are some improvements, such as a significant rise in net cash provided by operating activities, but ultimately debt is still rising and Sprint is not profitable.

While I hope that Sprint will turn the tables by cutting a combined $2.5 billion in operating costs from last year to this year — this cut has helped boost its net cash provided by operating activities — investors must be realistic about Sprint’s debt, and the timing of it maturing.

For example, Sprint had just $1.2 billion in debt mature last year, but that number jumps all the way to $3.6 billion this year, which pretty much accounts for all of Sprint’s cost cuts.

As the years progress, obligations are only going to rise, and unless Sprint can eventually earn what it has spent in past years, I don’t see how it survives long-term.

In other words, I would not want to own Sprint stock now or any time soon, regardless of its improvements.

As of this writing, Brian Nichols does not own any of the aforementioned securities. 

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/sprint-stock-s-dont-celebrate-yet/.

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