Text size

Pacific Crest’s Michael Bowen this morning cuts his rating on shares of Sprint (S) to Underweight from Sector Weight, writing that even deep discounting appears not to be helping the company.

Shares of Sprint are down 15 cents, or 4%, at $3.34.

"Sprint's CFO's commentary that 'we will see a blip in churn this quarter,’” writes Bowen, "T-Mobile's commentary that the impact of Sprint's 50%-off promotion is fading, and our belief that Sprint is tightening credit standards suggest that our estimates for postpaid net additions and churn were too aggressive."

"If 50% off isn't working, what will?,” asks Bowen.

Specifically, he had been expecting 290,000 in net postpaid phone additions this quarter "and 200,000 net postpaid tablet additions for a total of 490,000 postpaid net additions.” But the CFO comments, and comments from T-Mobile US (TMUS) are giving him pause. He also notes the company’s tightening its credit policies which could increase churn.

Bowen cuts his revenue estimate for revenue for Q4 (ended in March) to $7.88 billion from $8 billion, though he actually raised his estimate for adjusted Ebitda to $1.99 billion from $1.8 billion. The Street is modeling $8.05 billion and $1.95 billion.

For the full year 2016, the cut his estimates to $32.02 billion and $9.46 billion in Ebtida from a prior $32.81 billion and $9.62 billion. That’s below consensus for $32.9 billion and $9.66 billion in Ebitda.

However, most of Bowen’s note is taken up with the company’s use of leasing — first in its leasing of handsets to subscribers, and now in its recent announcement it will sell and then lease back its own network infrastructure.

Bowen doesn’t like how Sprint is using network lease proceeds to mortgage the future by paying off coming debt maturities:

However, while the network lease company should achieve its goal of paying off the upcoming maturities, Sprint merely has moved these maturities into later periods, likely to buy the company time to implement its cost-savings strategy. We view the network lease company transaction as essentially an asset sale, which by nearly any standards is not an optimal scenario.

He also thinks Sprint's Earnings befroe interest, taxes, depreciation and amortization, or Ebitda, is inflated by the leasing of handsets:

Sprint's focus on leasing devices results in greater distortion to the true cash-adjusted EBITDA. The differences between reported and cash adjusted EBITDA include the depreciation of leased devices, and for T-Mobile, the impact of data stash. Below we show Sprint and T-Mobile's reported and cash EBITDA margins. Importantly, one can see a wider gap between reported and cash-adjusted EBITDA margins for Sprint than T- Mobile, which shows the greater focus on leasing at Sprint. We estimate that Sprint's cash adjusted EBITDA margin will be approximately 28% lower in 2016 compared to its reported adjusted EBITDA, which is important to our valuation methodology.