Sprint Corp (NYSE:S) stock has taken a breather in 2017 after a spectacular 2016. S stock gained 139% last year, and tripled off early year lows. At the moment, however, Sprint trades about flat for 2017, despite continued improvement in its core business.
The pause perhaps makes some sense. The wireless space remains highly competitive. Unlimited data plans take away potential revenue from data overage and per-gigabyte plans.
Pricing wars for unlimited plans between Sprint, T-Mobile US Inc (NASDAQ:TMUS), Verizon Communications Inc. (NYSE:VZ), and AT&T Inc. (NYSE:T) could pressure margins going forward.
For Sprint in particular, the talk of a S-TMUS merger has reached a boiling point, and some investors may feel the benefits of a tie-up largely are priced in. Meanwhile, T-Mobile appears to be outperforming Sprint (with both companies taking shares from Verizon and AT&T), leading investors to prefer TMUS stock to S stock.
Still, there are plenty of reasons to believe that Sprint stock will resume its upward march in 2017. There are risks here to be sure. But there are always risks in investing in stocks. Few stocks, however, have the catalysts that S stock does.
Catalyst No.1 for Sprint Stock: Improving Operations
The most obvious catalyst for S stock is that Sprint’s business is getting better quarter by quarter. Third-quarter fiscal 2016 results showed a 5% increase in revenue — no small accomplishment in a low-growth industry. Net postpaid subscriber additions were the best in four years. Sprint took customers from Verizon and AT&T for the fourth straight quarter, with its own figure improving for the ninth consecutive report.
Sprint’s aggressive advertising campaign, using a former Verizon pitchman (and recently mocking a Verizon ad), is working. And given the huge fixed costs of operating a wireless network, those incremental subscribers are extremely valuable. In Q3, Adjusted EBITDA increased 29% off the back of the 5% revenue increase.
While Sprint remains unprofitable, largely due to interest expense, S stock remains relatively cheap on an EV/EBITDA basis. FY16 guidance suggests a current EV/EBITDA multiple below 7x. Operations alone can drive equity value through both EBITDA growth and a higher multiple (based on investor confidence). But that’s the not only path for Sprint stock to see upside.
Catalyst No.2 for Sprint Stock: Monetizing Spectrum
Sprint’s wireless spectrum is extremely valuable. A Bloomberg Intelligence survey some two years ago suggested spectrum alone could be worth $86 to $115 billion. As a point of reference, Sprint stock and debt net of cash combined (its enterprise value) is worth just $68 billion. Monetizing that spectrum and shutting down the business, in theory, would get S stock into the double digits.
Sprint also has issued innovative debt, backed by that spectrum. Those bonds have a sharply lower interest rate — just 3.375%. That rate has allowed Sprint to save $100 million a year in interest payments, which alone probably adds ~$1 billion in value to Sprint stock (assuming a 15x multiple on the extra after-tax profits). And it provides more flexibility for S to manage its debt load, particularly with some $9 billion in debt coming due over the next two years.
Catalyst No.3 for Sprint Stock: M&A
And, of course, there’s M&A. A T-Mobile-Sprint deal seems preordained at this point, but it’s not guaranteed. It’s possible that a Sprint-T-Mobile merger might not make it through antitrust review, even under President Trump. BTIG Research’s Walt Piecyk has pointed out that Trump has battled with the CEOs of both companies. Sprint’s majority ownership by Japanese conglomerate Softbank Corp. (Japan) (OTCMKTS:SFTBY) and the possibility of post-merger job losses may not sit well with the president or his party, either.
But that’s not the only deal out there. Comcast Corporation (NASDAQ:CMCSA) could be interested. Charlie Ergen’s DISH Network Corp (NASDAQ:DISH) could mimic the AT&T-DirecTV tie-up by acquiring either T-Mobile or Sprint.
More broadly, if Sprint continues to succeed, it will draw interest as an acquisition target. While the speculation is fun, it’s not terribly germane to the bull case for Sprint stock. As long as operations improve, and as long as Sprint has hugely valuable spectrum assets, S stock should do just fine.
What Is S Stock Worth?
I still believe S stock is worth over $10 per share, at least. A 7x to 8x EBITDA multiple is hardly aggressive, particularly with Sprint’s balance sheet likely to be cleaner come 2018, once near-term maturities have passed. A ‘fire sale’ of the spectrum likely still values the company at $11; improving EBITDA and a 7.5x multiple could get the stock to $15 by 2018.
Again, there are risks. The most obvious is if Sprint can continue its momentum in net subscriber additions. Pricing is a potential issue as well. But there’s enough good news relative to S stock to offset even bad news on either front. Sprint has a lot of value, in a lot of different ways. And so does Sprint stock.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
