Analysts react to Sprint’s improving performance; not all are convinced

Sprint made a big impression on Wall Street this week, convincing some of its critics it is indeed moving in the right direction. The nation’s No. 4 carrier in terms of customer base reported 173,000 postpaid net phone additions, more than twice as many as larger rival Verizon Wireless. The company also hinted the deep discounts it has been offering customers may soon be history.

Analysts are divided on the outlook for Sprint. Wells Fargo’s Jennifer Fritzsche thinks Sprint will soon be able to increase prices “as a result of improved brand image and network quality.” Sprint’s network quality is closely tied to its LTE Plus initiative, which includes carrier aggregation. This year Sprint expects to roll out three-carrier aggregation, which could enable peak speeds of up to 200 megabits per second for smartphones that can aggregate three spectrum carrier channels.

“We believe there is high likelihood the new iPhone 7 will have [three-carrier aggregation] capabilities, which could be a significant game changer for Sprint customers and their experience on the Sprint network,” said Fritzsche, who added Sprint already has five non-iPhone devices on its network that support three-carrier aggregation.

Fritzsche expects Sprint to outperform the market, and attributed much of this week’s increase in the stock price to purchases made by short sellers who appear to finally be convinced the stock is set to trade higher in the months ahead.

Racing the clock?

Some of Sprint’s naysayers remain unconvinced by this week’s news. Craig Moffett of MoffettNathanson is still telling investors to sell Sprint, which he values at roughly $2 per share. Moffett points out that handset financing plans artificially inflate operating income for all the wireless carriers, and Sprint’s reliance on lease plans gives it the most distorted financials among the mobile operators.

“Without the artificial boost that comes from counting lease revenues while excluding their associated handset costs, Sprint’s wireless business is currently trading at 6.5x trailing twelve months [earnings before depreciation, interest and taxes],” said Moffett. “Their ‘real’ EBITDA growth is still negative, [average revenue per user]is still falling (albeit now at a slower pace), and free cash flow remains negative despite exceedingly low capital spending.”

Sprint’s “exceedingly low capital spending” is likely to be the key to its future. If the carrier can continue to improve network performance without making large investments, cash flow is likely to turn positive. Sprint foresees a faster, more reliable network winning more customers and boosting revenue, while modest capital spending helps keep costs under control. The carrier wants to densify its LTE network through a series of small cell deployments, which it says will be less expensive than macro site builds.

Sprint reported total capital expenditures of just $473 million during the most recent quarter. T-Mobile US reported $1.4 billion for its wireless network, and the two largest carriers invested even more, but do not typically separate investment in their wireless networks from investment in their wireline networks.

“Sprint’s capital spending speaks to the tightrope the company is walking,” said Moffett. “They are trying to restore a company to growth (even with positive subscriber growth, core wireless service revenues are still down 6.9% year on year) while simultaneously husbanding cash to stave off insolvency.”

But Moffett admits Sprint’s subscriber numbers are markedly improved and that the outlook for the carrier is less bleak than it was earlier in the year. Moffett said the No. 1 question investors should be asking about Sprint is “what is a reasonable level of capital intensity?”

The answer to that question has everything to do with how efficiently Sprint can deploy its limited capital. Carrier aggregation and small cell densification are two technologies that could make the difference for Sprint. Carrier aggregation can often be implemented at a cell site by replacing network cards as opposed to adding new radio equipment, meaning it’s less expensive than some other types of network upgrades. Small cell sites can be much less expensive than new macro sites, and can often target dense areas more efficiently, but the small cell cost savings can evaporate when zoning and permitting disagreements lead to litigation or fines.

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