iBooyah's view on Sprint Nextel (S)
Sprint Nextel (S) – The merger of Sprint and Nextel was a combination of two companies that were in free fall hoping to save one another. After about a year as single entity, the jury is still out on the company’s long term performance. At current level ($17 per share), is it time to jump in?
The telecom industry is going through a revolution as new technology such as Voice over IP (VOIP) and even applications such as Instant Messaging are having an impact on the bottom line. A combination of fierce competition and new communication technologies have virtually done away with long distance calls. While telecoms are still profiting from long distance, it is not as it used to be.
As an industry, the future growth outlook is daunting. Telecoms are finding it difficult to keep margins up as new competitors enter the market. Price war is also common among these telecommunication companies. While price war is great for consumers, the companies however pay for it dearly with lower earnings.
Looking over Sprint Nextel earning over the year, this company financial is basically flat on the top line. Bottom line is worse; net profit is down quarter after quarter. This is fundamentally the reason the stock is trading at $17 per share. The growth prospect is low. Our view on the stock is it has hit bottom at round $16-17 per share. Therefore, the risk this stock will continue to drop further is quite low. All the negative news appears to have been accounted for.
Amid all these negative sentiments, there are some promising catalysts. Among them is the Sprint TV service. We have actually tried it as we happen to be a Sprint customer. To our surprise, the technology is actually decent. The video streaming actually works on our cell phone (albeit, it was on a tiny screen). We believed there is a lot of potential with this product. Video on our cell phone will be the next big thing. In the very near future we could all be watching news clips and sports highlights on our phone.
If Sprint Nextel is unable to improve the situation this year, we see couple of possibilities. The company will either be acquired, possibly by a private equity firm or by one of its rival. Verizon (VZ) could potentially be a suitor. If acquisition is not in the cards, the company will need to further reduce the overall cost structure, which usually means mass firing and management overhaul. While we remain cautious about investing in Sprint Nextel (S), at $17 per share, this stock does appear to have reached bottom so it is attractive in that respect. If one is interested in this stock, it would be smart to buy a small position now in case sentiments improves. Again, our view is the downside is low at this level.
