Sprint Corp (NYSE:S) is on a hot streak. Not only is Sprint stock on an uptrend, but the jury awarded it nearly $140 million in damages in a case with Time Warner Cable, now under Charter Communications, Inc. (NASDAQ:CHTR). Time Warner Cable was found to have infringed on the company’s digital voice phone service patents.
Sprint needs all the cash it can get. The company’s debt-to-equity ratio is around 2X.
For years, the company’s cash flow was held back as S invested heavily in its network. In 2013, the company turned on LTE TDD, a move that allowed it to compete with AT&T Inc. (NYSE:T). Sprint’s continued investments in the back-end may mean it will be the first to offer 5G.
Three Strengths Behind Sprint Stock
Strong Merger Options
Softbank Corp. (Japan)’s (OTCMKTS:SFTBY) 80% ownership of Sprint’s shares is limiting the full value of S stock. If its majority owner invests more in Sprint, it may help Sprint supersede its former buyout idea, T-Mobile US Inc (NASDAQ:TMUS). The performance of S stock may encourage Softabank’s CEO, Masayoshi Son, to pursue merging the T-Mobile merger. That decision would drive Sprint stock much higher.
Currently, S trades at a price-to-book ratio of 1.7X, compared to 2.7X for T-Mobile.
Combining T-Mobile with Sprint would benefit consumers and advanced the telecommunications market. The two companies already offer Project Fi. This gives consumers unlimited Wi-Fi and VoLTE services at an affordable price. The merged company would have a better chance at competing with Verizon Communications Inc. (NYSE:VZ) and AT&T. Sprint holds the spectrum, which TMUS needs. Together, the T-Mobile-Sprint pair could disrupt the broadband and video markets.
On its own, Sprint stock has strong fundamentals. In the third quarter, S grew customers with 577,000 total net additions. Most of its growth was in the highest profit contribution category. Unlike its competitors, which grew subscriptions through promotions and discounts, Sprint stock relied on its branding alone. Fair, affordable plans will continue attracting customers. The iPhone Forever program hurt churn rate, but management expects stronger customer retention.
The company’s advertising of “Unlimited Freedom” is resonating with customers. By touting the reliability of its networks compared to competitors, expect more customers leaving AT&T and Verizon and signing up with S.
Strong Balance Sheet
Although debt levels are elevated, Sprint stock’s balance sheet is healthy. The company ended the third quarter with over $9 billion in liquidity. Its adjusted EBITDA improved by over $500 million year-over-year.
Furthermore, S cut expenses by $1.1 billion for the full year. SG&A spend fell $548 million, from $6.5 billion last year. The company raised $3.5 billion during the quarter. Backed by its spectrum, the senior notes issuance will cut Sprint’s interest costs and lower its cost of capital.
Bottom Line on S Stock
By cutting its costs, Sprint is leaner than ever. OpEx reductions will continue this year, but not so much that services will suffer. Speculation of a merger with T-Mobile will keep the S stock price elevated. Although it is impossible to gauge the odds of a merger, Sprint stock is still attractive for patient investors, as its market cap is the lowest among the wireless telecom firms.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.