- Sprint's current stock price has been severely punished in the last two years over legitimate concerns.
- However, the company is delivering on the turnaround metrics and putting those concerns to rest.
- This creates a great entry opportunity into the stock because valuations have become really cheap.
For a while, the Sprint (NYSE:S) stock price decline could be justified. The market had legitimate concerns over Sprint's high default risk due to deteriorating operating income. To make matters worse, Sprint's postpaid churn was rising while postpaid phone net additions were declining. This is why it was not a surprise when the stock declined by more than 70% in the last two years.
(Source: Nasdaq - Sprint Corporation Interactive Stock Chart)
But after Sprint's Q4 2015 earnings results, its valuation has become too cheap. This is because the company has been able to put all the aforementioned concerns to rest.
For example, in FY2015, Sprint generated positive annual operating income ($310 million) for the first time in nine years. This happened while EBITDA was growing at 36% y/y. But what made their balance sheet even better is the improved liquidity position. Sprint currently has $11 billion in committed liquidity. In addition to that, Sprint's multi-year cost reduction strategy is working. The company managed to realize $3.1 billion reduction in SG&A expenses in FY2015. Furthermore, Sprint expects a sustainable reduction of $2 billion or more of run rate operating expenses moving forward.
But with any company, how customers perceive your product is what is critical for future growth. This why postpaid net additions and postpaid churn metrics are paramount to Sprint's success. In FY2015, Sprint managed to record the highest postpaid net additions in three years as shown below. To put that into perspective, Sprint delivered more postpaid phone net additions than Verizon and AT&T for the first time on record as of Q4 2015, implying that more people switched to Sprint in Fy2015.
(Source: Sprint's FY2015 & Q4 2015 earnings presentation)
Besides increased postpaid phone net additions, postpaid churn rates are instrumental for growth because they show you if a lot of people are leaving Sprint for other carriers. As of Q4 2015, Sprint's postpaid churn of 1.61% and phone churn of 1.52% are the best in the company's history. Also, FY2015 recorded the best-ever postpaid churn in any fiscal year in the company's 20-year history in wireless and best y/y improvement in churn in 12-years.
This is why Sprint's valuation metrics at its current stock price of $3.47/share does not make much sense.
First, at the stock price of $3.47/share, Sprint is trading at well below the most bearish street estimate out there. In a survey of 21 brokers conducted by Thomson, Sprint's lowest price target price is $6.0/share and its mean price target is $7.28/share. Implying that Sprint's current stock price would have to increase by ~73% to align with Wall Street's most bearish sentiment, and it will have to rise by ~110% to align with Wall Street mean price target. This can imply that Sprint's stock price has exhausted all the possible downside risks, meaning that the stock is undervalued.
Second, at $3.47/share, Sprint is an attractive value play. Its book value per share as of Q4 2015 is $5.12/share. Meaning that it is currently trading ~32% below book value. Considering that Sprint has been able to show tremendous progress in its turnaround story, the fact that it is trading below book value makes the stock an attractive value play.
In conclusion, Sprint's network is getting better amidst cheap valuations and improving credit worthiness.
Lastly, Sprint's network is performing better than ever for both the voice and data according to the company. For example, CommScope, a communications network infrastructure solutions committed to deploying S1000 small cells for "use in traffic-intensive small and medium-sized business locations." Deployment of the CommScope "S1000 small cells is designed to deliver even faster data speeds indoors and ensure high quality LTE experience. CommScope S1000 small cells are a highly cost-effective way for Sprint to deliver faster data speeds than competitors.
This is a great milestone for Sprint because its turnaround is going well. Valuations are cheap. Default risk is getting very low. More and more people are switching to Sprint relative to how many are leaving the carrier. All these positive indicators suggest that the bearish case for Sprint does not make sense.