The strong gains posted by Sprint Corp (NYSE:S) over the past year haven’t necessarily come from earnings. Sprint stock is up 230% over the past year, yet the company remains unprofitable and is hoping this year to simply break even in terms of adjusted operating cash flow.
This, however, excludes one-time charges and doesn’t account for capital expenditures. Both figures are substantial: capex alone was guided to more than $2 billion in fiscal 2016 (ending March 2017) on Sprint’s third-quarter conference call.
In other words, Sprint is still losing money — and burning cash — in fiscal 2016. But, Sprint stock has nearly tripled over the past 12 months, regardless. Investors are clearly hoping for a turnaround, one possibly accelerated by a merger with T-Mobile US Inc (NASDAQ:TMUS). And, those turnaround hopes are based, in large part, on Sprint’s assets, most notably its wireless spectrum holdings. (The deep pockets of majority owner Softbank Group Corp (OTCMKTS:SFTBF) help as well.)
Sprint estimates the value of its spectrum at approximately $40 billion — more than enough to pay off all of the company’s debt. However, many analysts and investors believe that number is conservative. The company claims to have the best portfolio in the U.S., and appears to be correct. As Sprint moves forward, and as the industry moves toward 5G, Sprint’s spectrum should be an important part of the case for S stock.
The Spectrum Portfolio
Sprint’s subscriber base lags behind those of larger peers AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ). But, its asset quality is better than those of either rival. Sprint acquired Clearwire Corp in 2013, which gave it a strong footprint in the highly-valued 2.5 GHz band. Sprint outbid DISH Network Corp (NASDAQ:DISH) for Clearwire’s assets, eventually paying $3.5 billion, and the price was questioned at the time. In retrospect, however, it was a brilliant purchase.
The 2.5 GHz band is valuable as LTE and, eventually, 5G services are rolled out. The higher bandwidth offers greater capacity for increased data demands. Adding to that advantage, in December, Sprint announced the rollout of HPUE (High Performance User Equipment). That technology will improve performance at 2.5 GHz, further boosting speeds. It also helps with coverage, as the technology limits the trade-off between speed and reach. (Faster reach generally implies poorer coverage.)
So, while Sprint admits that its network isn’t quite up to the level of the two larger players in its space, and S stock remains far less valuable than either T or VZ, it may not always be this way. Sprint’s spectrum has the ability to make Sprint a much stronger competitor going forward, which would imply further gains for S stock.
How Sprint Spectrum Can Drive Sprint Stock
Sprint ads (featuring a former Verizon pitchman) now point out that the network is only 1% less reliable than Verizon’s, but that may change going forward. Sprint’s high-end spectrum, combined with HPUE, could create a significant competitive advantage in the U.S., which could be combined with Softbank’s spectrum holdings in Asia to create a global data powerhouse.
That process will take years, and billions of dollars in spending from Sprint. 5G likely won’t be widely available until after 2020, with Verizon already promising it will be first to market. From this standpoint, S stock requires some patience — worries about how, exactly, Sprint is going to fund that spending have plagued S stock for some time.
Sprint didn’t bid in a 600 MHz auction last year, a move that actually pulled S stock down. While the company said it had enough high-band (2.5 GHz) spectrum, investors worried that Sprint simply didn’t have the cash to participate. With approximately $9 billion in debt maturing in the next two years, those concerns weren’t unfounded.
But, Sprint has used its spectrum to help its balance sheet, issuing bonds late last year that were guaranteed by its spectrum holdings. Sprint raised $3.5 billion in the deal and has said it may issue a similar amount in the future. Not only did the issuance help liquidity, it saved the company a substantial amount of money.
The bonds pay interest of just 3.375%, and were rated investment-grade. Sprint’s unsecured debt yields more than 6%, meaning Sprint likely saved in excess of $100 million per year in interest payments through the innovative bonds. Another issuance could further de-risk the balance sheet and cut interest costs, resulting in an immediate boost to free cash flow.
What Is Sprint Spectrum — and Sprint Stock — Worth?
As noted, Sprint carries the spectrum on its books at about $40 billion. But most analysts see a much higher value. Almost two years ago, Bloomberg Intelligence cited a potential range of $86 billion-$115 billion. Sprint’s enterprise value is just $68 billion.
Even the low end of the range would value S stock near $13. Add to that the value of the business, any potential appreciation over the past few years, and further operating improvements, and there’s a strong case that Sprint stock should be valued well above its current share price of $8.75.
S stock isn’t a riskless trade, to be sure, given the company’s debt and competitive environment. But, the notion of Sprint as a second-tier player behind AT&T and Verizon misses the fact that its spectrum is second to none. That’s a big asset for the company, and for Sprint stock, going forward.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
