Sprint Nextel (NYSE:S) shares soared Wednesday on news that the U.S. Justice Department was seeking to block the$39 billion merger between AT&T (NYSE:T) and T-Mobile, which currently is owned by the German telecom giant Deutsche Telekom.
On the surface, the news appears to be favorable for Sprint. Had the merger gone through, Sprint would have become the third dog in a two-dog race between Verizon (NYSE:VZ) and AT&T.
Still, investors who fixate on the merger and its effects on Sprint miss the point. With or without T-Mobile as a competitor, Sprint remains the most poorly managed of all major mobile operators in the United States. The company took on too many debts in pursuing ill-conceived mergers that made little strategic sense — such as the purchase of Nextel — and now is left to deal with the consequences. T-Mobile’s status does not affect any of this.
It might surprise you to hear me say this, but even with all of Sprint’s shortcomings, I consider it a screaming “buy.”
As I wrote in a recent article, Sprint is one of the cheapest stocks in America, trading for less than one-third of sales and at less than 80% of book value. On Friday morning, Sprint was trading at $3.74 per share, yet the company has $1.43 per share in cash. Nearly 40% of the stock price is the company’s cash in the bank. And that was after Wednesday’s sharp rise.
Given how cheap Sprint is, the company doesn’t have to do particularly well as a business to see its stock price soar from current levels. It simply has to survive, and I do not consider the company’s survival to be in question at this time. When a company is left for dead, even a marginal improvement is all it takes to get investors interested again. I expect Sprint to double during the next 12 months.
The beauty of a company priced as cheaply as Sprint is that your downside is relatively limited while your upside is enormous. And the Department of Justice’s announcement — though really irrelevant in the grand scheme of things — might be just the spark the stock needed.
Remember, though: Sprint should be viewed as a temporary love affair and not as a lifelong spouse. Given the problems the company faces, this is not a stock I would want to buy and hold. Should the stock rise above $7, I recommend investors look to make their exit. Sprint is attractive only because it is one of the cheapest stocks in the world. Investors shouldn’t lose sight of that.
Charles Lewis Sizemore, CFA is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new Special Report: “3 Safe Emerging Market Stocks for a Shaky Market.”
