On the surface, Sprint Corp (NYSE:S) stock finally looks like it has a shot at pulling out of a long-term nosedive. The wireless carrier topped its revenue estimates for its recently completed fiscal first quarter. And while the per-share loss widened on a year-over-year basis, it was in line with expectations.
Better yet, Sprint CEO Marcelo Claure made it clear the wireless service provider was still on pace to post an operating profit of between $1 billion and $1.5 billion this year, thanks to some help from a price hike in the near future.
The thing is, Claure glossed over a key aspect of the plan that current and would-be owners of S stock should be mulling.
Sprint’s First-Quarter Earnings
The quarter undeniably offered up some encouraging data nuggets. One of them was the net addition of 173,000 postpaid subscribers; its postpaid churn rate of only 1.39% was the best in Sprint’s history, and its growth in that segment of the market outpaced its rivals for the first time in more than five years.
The company also lowered its expenses by $550 million on a year-over-year basis, and ended the quarter with $11 billion worth of liquidity — more than twice what it started the quarter with. Ebitda was up 18% year-over-year.
Off the books, Sprint continued to catch up with its competitors on the connection-quality front. Its LTE network is now measured as the fastest in the U.S. market, and the reliability of its network is now shoulder to shoulder with the bigger names like AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ).
Still, revenue fell from $8.8 billion in the same quarter a year earlier to $8 billion this time around and the net loss widened from a penny per share to eight cents per share.
S Stock: The Rest of the Story
Giving credit where it’s due, Sprint’s turnaround effort does look like it’s getting a little traction, even if it had to sell some of its network assets to ensure its liquidity as it continues to work through the turnaround process.
The company isn’t quite the fiscal juggernaut today’s buyers of Sprint stock seem to want to think it is, however.
First (though no longer foremost), while the operational income numbers were said to be strong, when it was all said and done, they weren’t.
Operating revenues fell by about $15 million, while operating income fell $140 million on a year-over-year basis. The depreciation total for leased devices (which is removed after the Ebitda figure is calculated) grew from $276 million a year ago to $644 million last quarter … one of the mostly-ignored drawback of last year’s deal with Mobile Leasing Solutions that put the leasing risk on a third-party, but added depreciation expenses to
The more Sprint pushes customers to lease phones, the greater this expense becomes that barely existed before. The question is, will greater depreciation be offset by bigger revenue? So far, it hasn’t been.
The other, and now bigger, concern is the looming price hikes Sprint is about to impose. As Claure explained:
“The 50% off promotion is not going to go on forever. There will be a time in the not so distant future in which we’re going to go back to traditional rate plans and we are doing some testing of other rate plans. As we get more momentum in the market like we’re doing now, then it’s going to be the time to increase pricing.”
It sounds great, on the surface. But, the premise ignores the distinct possibility that all those new subscribers who came only based on the service’s low price could — and likely would — go shopping elsewhere for the next great deal.
Bottom Line for Sprint Stock
Downsides notwithstanding, at the very least last quarter’s numbers suggest Sprint stock is one worth putting back on investors’ radars as a possible successful turnaround story.
Next quarter, and even the quarter after that, will confirm (or not) that Sprint is in a position to increase its prices. All the other numbers on the income statement are otherwise starting to look serviceable.
Indeed, interested speculators may find there’s a better entry point around the corner as the sheer size of the 130% rally since January starts to weigh on the minds of those who have a profit to take on the stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
