Shares in Sprint (S) surged after its first-quarter earnings for fiscal 2016 hinted toward progress in Sprint’s turnaround … but that hardly makes S stock a buy at these levels.
Sprint stock rallied hard Tuesday morning after its earnings exceeded the Wall Street forecast. Although management raised Sprint’s profit outlook, the telco still has a long way to go before it doesn’t look like a dog.
Bulls on S stock love the fact that after seven straight years of customer losses, Sprint finally posted user growth — a critical achievement and a pillar of Sprint’s turnaround plan.
But it’s also just one data point.
The over-saturated wireless telecom industry is so competitive that Sprint is in danger of achieving a pyrrhic victory. The only way to lure new users from here is to cut prices and offer other margin-eating promotions and discounts.
It also doesn’t address the reality that Sprint fell to fourth place in total users behind T-Mobile US (TMUS).
And TMUS will continue to run circles around Sprint, as Sprint’s additional 675,000 net subscribers owed a lot to tablet sales. In case you missed it, tablet sales growth has fallen markedly in the U.S.
Let’s not forget that there are very real concerns about what Sprint’s costly restructuring is doing to its balance sheet. You never want the market worried about your cash position, but that has become a topic of conversation for Sprint.
After all, Sprint is spending a fortune to improve its inadequate network, and it’s going to need to part with a bigger chunk of change still to participate in next’s year auction of wireless spectrum.
It’s Tough to Believe in Sprint Stock
You’ve got to give Sprint earnings the credit it deserves, though. After all, the company did serve up the market’s favorite meal: a beat-and-raise quarterly report.
For the three months ended June 30, Sprint swung to a loss, but not as deep as the Street was expecting. Sprint had a loss of $20 million (a loss of 1 cent a share), beating the consensus for a loss of 9 cents.
Revenue fell 8.7% to $8.03 billion. Although that missed Street estimates by about $300 million, the market’s been in a forgiving mood when it comes to top-line results this earnings season.
Even after the post-earnings action, Sprint stock is off roughly 16% for the year-to-date and 52% over the last 52 weeks. But it’s still too soon to say that shares are a bargain at these levels.
Sprint stock has a tortured history of appearing to break out on the stirrings of a successful new strategy, but the rally never lasts. Shares staged at least three extended rallies last year that all turned out to be fakes. Heck, by the first week of March, Sprint stock was up 30% for the year-to-date.
As welcome as the latest news on its turnaround might be, Sprint doesn’t have the track record to get the benefit of the doubt.
If the telco can string together a couple of quarters of turnaround progress, S stock will be worth a closer look.
For now, there are better places to commit new capital.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
