There’s no question that Sprint Corp (NYSE:S) has had a nice run throughout 2016, up 85%. Just about all of the gains in Sprint stock have come over the past three months, after Sprint’s fiscal first-quarter results back in late July. S stock has held and added to those 20%-plus gains in response.
Based on the performance of Sprint stock, one would think the company did something really special, such as growing revenue or turning an actual profit.
Not so. Sprint’s revenue was flat, and it lost 8 cents per share during the quarter.
Instead, S stock rallied after the company showed only modest net postpaid subscriber growth. It was Sprint’s best fiscal first quarter in nine years, but still a disappointment by any other wireless company’s standard. As a result, it makes no sense to conclude that Sprint has “turned the corner.”
If there is any company that does not deserve the benefit of doubt, it’s Sprint.
Sprint and All Its Adjustments
Sprint does what a lot of struggling companies do: It tries hard to avoid actual numbers in favor of adjustments. If you look at Sprint’s fiscal first-quarter report, it is nothing but a laundry list of whats-ifs and buts.
Sprint talks up its free cash flow and EBITDA, both of which are reported on an “adjusted” basis. That means Sprint removes all the items that make EBITDA and free cash flow negative. At the end of the day, the biggest question to ask regarding Sprint is whether debt rose or declined during any given quarter.
For Sprint, the direction is almost always up.
This is a company that bragged about having $11 billion in liquidity, but while AT&T Inc. (NYSE:T) is investing in IoT, Mexico and video, Sprint is making expense cuts and trying desperately just to be profitable.
Therein lies the reason for why Sprint stock is such a value trap right now.
Until Sprint becomes profitable on a consistent basis, it is a value trap. The company now has total debt of nearly $37 billion and another $17 billion in off-balance-sheet debt. More than likely, those off balance sheet financing vehicles is where Sprint is getting more than half of its liquidity, which also means higher debt.
A Sprint Stock Offering Is Inevitable
All things considered, I am not sure Sprint will ever be net income-positive. I think it has too much debt with interest payments and maturing debt that will prevent it from achieving financial stability. Keep in mind that Sprint had $3.6 billion in debt mature this year. Of course it will refinance some, but that means more interest and bigger payments down the road.
That said, S stock owners need to consider the impact that such a heavy debt burden has on a company. Sprint’s is so bad that I am not sure it will ever fully crawl out. Furthermore, it adds long-term risk to Sprint stock, besides the obvious operating concerns, and increases the likelihood for public offerings whenever Sprint trades with positive momentum.
Given that Sprint stock is higher by 80% over the last three months, it is not a matter of if Sprint will dilute the stock, but when. With a debt burden like Sprint, it must take every opportunity to create liquidity without increasing debt. At $6.70 per share, Sprint stock presents the perfect opportunity for an offering.
S stock holders will argue that an offering won’t happen. I argue that because of its balance sheet debt, off balance sheet debt, lack of profitability and the current value of its stock, Sprint almost has no choice. Collectively, these are also the reasons not to own Sprint stock, both short- and long-term.
At the end of the day, Sprint is a company with long-term, structural issues that are no closer to being solved than it was eight months ago at $2.50/share.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.