Credit Suisse widens loss estimates of Sprint Nextel
By Balasubramanyam Seshan | July 30, 2010 10:40 PM EST
Thursday, Credit Suisse widened its loss estimates of mobile operator Sprint Nextel Corp. as the company’s second quarter loss widened from last year. The brokerage maintained its Outperform rating on shares of Sprint with a price target of $6.
“Postpaid losses are improving at a faster rate than anyone expected. Prepaid, while weak, looks set to accelerate over the next two quarters. We are increasingly confident that retail subs will grow in third quarter, revenue will grow in fourth quarter, and EBITDA will grow in 2011. Based on these trends, it seems that the business has turned,” said Jonathan Chaplin, an analyst at Credit Suisse.
The analyst said the company’s management seemed to suggest that they have no intention to issue equity / convert to fund an outright purchase of Clearwire Corp. (this should eliminate a major overhang; however, management was not as direct as they could have been). Management was less clear on the prospect of taking control.
On the positive side, management would not oppose a T-Mobile / Clearwire MVNO (mobile virtual network operator) and are open to T-Mobile owning equity in Clearwire (would depend on what T-Mobile offers). In addition, management believes the Sprint / Clearwire networks can be better integrated with Clearwire remaining independent, Credit Suisse said.
The management values the company being able to raise external capital at Clearwire. Offsetting this, there is strategic value to controlling Clearwire and network integration would be easier with control, Credit Suisse said in a report to its clients.
The analyst believes the turn-around thesis has mostly played out to get to $6. The next leg of the fundamental story will hinge on cost savings that could come from the network request for proposal (RFP) process.
The savings could be considerable the analyst will be doing more work on this in coming weeks. In the meantime, Clearwire consolidation remains an overhang. The analyst is hopeful that a Clearwire / T-Mobile deal emerges, which should reduce / eliminate the overhang.
“We are set up for continued improvements in third quarter that should prove out the turn-around thesis (for those left doubting). Other potential positive catalysts include: a T-Mobile / Clearwire deal; a successful debt raise at Clearwire; more successful 4G product launches in second half of 2010,” said Chaplin.
The brokerage widened its 2010 loss per share estimate to $0.39 from $0.35, and its 2011 loss estimate to $0.20 from $0.13, while narrowing its 2012 loss estimate to $0.03 from $0.05.
The brokerage said Sprint is trading at a free cash flow yield of 19 percent compared to peers at around 10 percent. The brokerage believes the multiple is unjustifiable with the business on a path to growth.
Sprint shares closed Thursday down 1.65 percent at $4.76 on the NYSE.
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