Investors already knew Sprint (NYSE:S) has been on the defensive, struggling to remain competitive in a market that powerhouses AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) dominate. But, until Tuesday of last week, when Sprint reported its fiscal fourth-quarter results, the owners of Sprint stock may not have fully realized just how much trouble the company was in.
There was more than one red flag for Sprint stock, though the big one was the loss of 189,000 phone subscribers, topping the 117,000 voice customers analysts had modeled.
Sprint added 169,000 net new devices to its networks, but only thanks to the addition of 358,000 “data” devices, which are usually secondary (and lower revenue) devices used by existing phone-service customers. Without those, Sprint would have lost more than the 8000 net total subscribers it shed in Q4 versus Q3.
Sprint’s average revenue per prepaid and postpaid users fell, although the ARPU of its postpaid phone-only subscribers rose slightly. Their average monthly bill edged up from the prior quarter’s $50.01 to $50.18. But that figure was still down from the year-ago figure of $50.44.
Sprint’s EBITDA improved from $2.77 billion to $3.13 billion, and its operating cash flow increased from $2.65 billion to $2.85 billion. However, its free cash flow fell from -$240 million in Q4 of 2017 to -$539 million in Q4 of 2018.
The worsening cash flow is largely the result of a lease-turn-in program the company put in place back in 2015. As it turns out, Sprint can’t afford the promotion.
Sprint stock price stumbled last Wednesday after the company reported those results, despite the fact that nothing about last quarter was exactly new or surprising.
Sprint stock price has recovered in the meantime, mostly on expectations that Sprint’s poor results would inspire regulators to go ahead and approve its merger with T-Mobile US (NASDAQ:TMUS) rather than risk letting Sprint fall apart and cede even more market share to Verizon and AT&T.
Indeed, given the slow and relentless deterioration of Sprint’s business — again, last quarter’s results weren’t uncharacteristic — the owners of S stock may want to upgrade their hopes that the T-Mobile deal gets done to prayers.
Analysts certainly don’t see any other viable way out for Sprint stock.
What They Said
“Sprint won’t survive as a stand-alone company with their current capital structure,” wrote New Street Research analyst Jonathan Chaplin, adding “If the T-Mobile acquisition is blocked, Sprint will need to find another deal. If they can’t find another deal they will likely need to restructure sooner or later. I have a hard time imagining anyone wanting to buy Sprint.”
The restructuring Chaplin referenced was at least a partial nod to the company’s $35.36 billion in long-term debt, which forced the company to shell out $629 million worth of interest payments last quarter. Sprint has been working to whittle down its debt burden, though that’s proving difficult.
Oppenheimer analyst Timothy Horan noted “We remain sidelined on Sprint (stock) due to the merger, though (we) believe that Sprint would have difficulty remaining competitive as a standalone company.”
It was MoffettNathanson analyst Craig Moffett, however, who dished out the most eyebrow-raising assessment of the matter for existing and prospective owners of Sprint stock. He explained, “The most recent articulations of their predicament are the most urgent yet. Not only is their network badly deficient, they now concede, their communications with the investment community have also been ‘highly selective’ at best, and intentionally misleading at worst.”
If Moffett is right, even last week’s concerns voiced by the company itself may still not fully paint the picture of how much trouble Sprint stock is in.
The Bottom Line on Sprint Stock
There may be more hope on the horizon for S stock than is readily apparent.
The bulk of the government’s concerns about the deal to date has been expressed by the Federal Communications Commission, although the Department of Justice itself has been interested in telecom companies as well. Allowing the third and fourth biggest wireless names to combine would take another competitor off the table, possibly setting the stage for higher, unchecked prices from the likes of AT&T and Verizon.
The FCC and the DOJ, however, may offer some pushback more for effect than out of actual concern. That is, regulators don’t want to appear to be pushovers when it comes to mergers because they don’t want a surge of completely anti-competitive mergers to take place.
The FCC and the DOJ likely know the wireless market is going to turn into a three-horse race in the end anyway, one way or another. And it’s better for consumers to have three solid players than two strong players and a still-distant-third T-Mobile all scrambling to pick up the pieces of a shattered Sprint.
The toughest part for the owners of Sprint stock is waiting for that green light. Sprint clearly can’t continue to do business in its current condition, and every day it has to wait is another opportunity for the Sprint stock price to lose ground.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.