Sprint Sees Growth Ahead and Vows to Get Aggressive on Debt

Sprint Nextel (S) is getting a boost today after announcing that it will continue strict cost management in an effort to aggressively pay down debt. During a discussion with analysts, Sprint’s CFO Bob Brust reiterated their goals to reduce the debt burden which has slowly declined since the Nextel acquisition, too slowly for many investors. Sprint has seen improving trends as far as customer retention or churn rate in the last few quarters, but it is still a huge hurdle as more than half a million post-paid wireless clients defected to competitors in the fourth quarter. Perhaps most importantly though, Brust expects to see revenue growth in the coming quarters; it would be the first growth since fiscal 2006.

Obviously, when Sprint acquired Nextel they took on debt to finance the transaction, but they expected better growth and cost savings as a result of the transaction. Instead, the company has dealt with declining sales almost as soon as the $35 billion transaction closed. In hindsight, the so-called “merger of equals” has lead to plenty of headaches for the combined company and on Friday Sprint’s credit rating was chopped yet again by S&P to BB-. The credit rating agency pointed to continued churn in their precious post-paid wireless clients (504,000 post-paid subscribers lost in Q4), which is more profitable than the prepaid wireless service, which is at least growing.

The CFO’s comments awakened excitement in investors that a turnaround may be underway. In order to stem the subscriber losses, Sprint has recently advanced into an aggressive ad campaign recently where they detail a $69 plan that allows unlimited talk, text and web usage. Sprint’s competitors have similar priced plans for unlimited voice plans, but they charge extra for the other components. The ads show CEO Dan Hesse saying that cell phone users rarely use their mobile phone only for calling anymore; instead, consumers increasingly use smart phones for a variety of uses outside of talking. There is no doubt that consumers are sensitive to price, so we will be interested to see what kind of traction this message will have.

We continue to see Sprint Nextel as Undervalued at the current price level, even though fundamentals have degraded considerably in the past few years. Consider price-to-cash earnings as one example of valuation, over the past ten years S has normally traded for 3.3x to 6.9x cash earnings per share and the stock currently trades for just 2x. Similarly, price-to-sales per share have normally traded .73x to 1.40x, but it currently stands at only .32 despite the slumping revenue.

According to our methodology, it is clear that Sprint has fallen out of favor with the market. Today, Sprint’s CFO did not say anything unexpected especially considering their slipping credit rating, but the stock has advanced 6% in response. The company has not performed well since the merger with Nextel, but the market may be starting to buy into their turnaround strategy.

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