Sprint (NYSE:S) fell to around $6 after Monday’s general topple and continues to hover around there, flirting with a break below major moving average support. The decline in Sprint stock also comes amid the company’s dual effort with T-Mobile (NASDAQ:TMUS) to salvage their planned merger attempts.
Can they pull it off? Perhaps, but the clock is ticking. Maybe that will get S stock down to the $5.50 level, which gives investors a more favorable risk/reward entry.
Sprint and T-Mobile Merger
We’ve been hearing about a possible Sprint/T-Mobile tie-up for years. Once AT&T’s (NYSE:T) acquisition of Time Warner was approved last June though, that got the ball rolling with Sprint and TMUS. On June 15, the two companies finally put through their merger application with the FCC.
What’s followed has been a long list of rumors, reports and a lot of back-and-forth. First there were reports the FCC favored a merger and a telecom market dominated by three major carriers (the third being Verizon (NYSE:VZ)). More recently, it was suggested that the FCC is reportedly 50/50 on the merger. That was in April. On that same day, Citi analysts said there could be 50% downside in Sprint stock price if the deal doesn’t go through. That was with the stock at ~$5.90.
So where are we now?
New reports show S and TMUS are making concessions to try and get the deal approved by the FCC and DoJ. The FCC has implemented an informal “180-day shot clock” for reviewing the merger. That “shot clock” has been paused several times now, with the government shutdown and new merger plans being a few of the reasons. That clock most recently began ticking again on April 10th and we’re now on Day 162.
I don’t know if the deal will go through, but a decision either way could be coming down soon. That is, if they follow the shot clock and don’t pause it in the next few weeks.
Valuing Sprint Stock
Sprint stock has been bumbling along in the single digits for years now. It hasn’t been able to get the growth it needs while reducing its debt and generating the profits that are needed for more investor money. AT&T and Verizon are cash flow machines. Sprint? Let’s just say it doesn’t have a long history of great cash flow.
Cash and short-term investments stand at about $7 billion, while total debt stands at $39.9 billion. Growth is anemic, too. Estimates call for earnings of 4 cents per share this year and 5 cents a share in 2020.
While this year’s forecast is up big from a penny per share in profit in 2018, 4 cents is still not all that impressive. Particularly as revenue estimates call for a 1.1% decline this year and a 90 basis point gain in 2020. If these estimates come to fruition, Sprint’s revenue in 2020 will be below that of its 2018 total.
In other words, Sprint needs a deal with T-Mobile , otherwise it will continue flailing about in the single digits. While that may mean a 40% or 50% gain under very rosy circumstances, it still lags what other telecom stocks bring to the table, at least from an investor’s perspective.
Since October, the $5.50 area has buoyed Sprint stock price and did so again earlier this month. Buying Sprint near $5.50 gives us a clear risk/reward, because we know exactly what we’re willing to lose. Should Sprint stock fall below $5.50, we can use the recent low of $5.44 as a point of reference. Our stop could be a dime below our entry, while allowing for a potential run back to $6 or even $6.50.
There are other considerations, too. First, Sprint stock is currently holding over the 10-week, 50-week and 200-week moving averages. Those are between $5.96 and $6.01 and should act as support at the moment. If they do, a bounce back to $6.50 is on the table. If they don’t, then $5.50 becomes possible.
Second, I personally will not trade Sprint stock because it’s entering a binary event. That is, shares could explode higher or crater lower depending on the merger ruling. I don’t like binary situations and will pass on Sprint for that reason. For those that don’t mind a risky, speculative setup though, $5.50 is a reasonable entry point.