Buy Sprint Stock Ahead of the T-Mobile Merger Approval

Although the T-Mobile (NASDAQ: TMUS) and Sprint Corporation (NYSE: S) merger is far from a certainty,  for now investors are combing through Sprint’s fourth-quarter results to see if Sprint stock still is worth getting in on.

Sprint Stock

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Shareholders liked the revenue growth and postpaid net additions in 2018 and did not worry over the higher capital expenditures. Today’s network capital expenditure will pay off tomorrow through higher subscriber growth and average revenue per user.

In the very near future, the introduction of 5G in select cities should accelerate that subscriber growth in the next few quarters.

Strong Fiscal 2018 and Sprint Stock

Sprint reported operating income of $398 million, while its loss of $1.9 billion is due to a non-cash charge of $2 billion. Adjusted EBITDA was $12.8 billion. Post-paid net additions of 710,000 is an increase of 286,000 from last year’s levels.

Cost controls resulted in a $1.2 billion gross cost reduction of services, general and administrative expenses. For this fiscal year, the cost cuts will be offset by incremental costs related to network and customer experience initiatives.

The Mobile 5G offering is through the execution of the Next-Gen Network plan. In the fourth quarter, Sprint deployed 80% of its 2.5GHz spectrum, with 30,000 outdoor small cells deployed. The 1,500 MIMO radios will increase the capabilities of its LTE network.

Sprint said that a software update will give 5G service in various cities in the coming weeks. Chicago, Atlanta, Dallas, and Kansas City are the cities that the company plans to offer 5G services first. Houston, Los Angeles, New York City, Phoenix, and Washington D.C. are next, with deployment set for the end of June.

Fourth-Quarter Results by the Numbers

Postpaid additions of 169,000 were offset by postpaid phone declining by 189,000. Total wireless additions was a net 8,000. Churn in postpaid, postpaid phone, and prepaid all rose slightly but not enough to concern investors. ARPU was mostly steady except for prepaid, which fell from $37.15 last year to $33.67.

Net operating revenue from service, equipment sales, and equipment rentals all rose. And on a non-GAAP basis, Adjusted EBITDA margin rose to 55.4%, up from 47.2% last year.

With numbers this strong, Sprint has potential upside even though the merger with T-Mobile is uncertain. Citi calculated a bear-case scenario where the deal would fall through and said Sprint would be worth just $3 a share. But Sprint has a manageable debt load, cut its costs and is demonstrating higher profitability. The 5G rollout will only lift ARPU and could potentially help the company accelerate subscription growth.

Merger Alternatives and Sprint Stock

If the Sprint/T-Mobile deal does not work out, Sprint could instead merge with Dish Networks (NASDAQ:DISH). Dish Networks would benefit from having a telecom unit in its business, diversifying the company from its pay-TV services.

Markets are confident that the T-Mobile/Sprint deal will go through because the stock, at $5.79, is not far from its high of $6.61. Sprint has a valuable network of 5G, so this high-speed network is of strategic importance for T-Mobile. Because T-Mobile has the low to mid-end of the spectrum, its signal can penetrate buildings in the city. Sprint is at the other end of the spectrum and offers high-speed services.

Investors could buy Verizon Communications (NYSE: VZ) and get a regular dividend yielding 4.26%. The stock topped over $60 a share and closed recently at $56.63. AT&T (NYSE: T) is a dominant player in the wireless space. Its stock dipped recently from over $32 down to $30.53. The stock now yields a dividend of 6.68%.

Your Takeaway

So few analysts cover Sprint stock that there is no price target available from Wall Street. Conversely, the street has a 15% upside target on TMUS stock. Analysts are even more bullish on AT&T stock, setting an 18% upside target price on shares. I believe the recent dip in Sprint shares creates a compelling entry point.

If the deal with T-Mobile moves forward, shareholders will get rewarded. Plus, owning a combined T-Mobile-Sprint company is worth the wait.

Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.

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