S Preview: Struggling to Make a Turnaround

Sprint Nextel (S - commentary - Cramer's Take) is slated to report earnings before the market opens Monday with a conference call scheduled for 8:00 a.m. EDT. Current projections call for the company to post a loss of 5 cents per share on revenue of $8.28 billion.

Recently, the stock has bounced pretty significantly as a lot of the lower-quality names typically do in early cyclical bounces. The company is in turnaround mode but hasn't yet demonstrated that it has begun to make that turn. Net subscriber losses continue to mount up, and I suspect that management will announce that the company lost another 1 million subs during the first quarter. Subscriber numbers must stabilize before Sprint can focus on growing the business again.

The problem with Sprint is due to the slippery relationships between carriers and handset makers. Most of the higher-profile handsets go to competitors because they have larger customer bases. As a result of being stuck with less-popular handsets (and some quality concerns), customer loyalty decreases and churn rates increase as customers migrate away. Look for post-paid churn rates around 2%, which is higher than the industry average.

This could begin to change, however, with the rollout of the Palm (PALM - commentary - Cramer's Take) Pre, which is set to launch exclusively on Sprint's network, similar to Apple's (AAPL - commentary - Cramer's Take) exclusive iPhone launch on the AT&T (T - commentary - Cramer's Take) network a few years ago and more recently Research In Motion's (RIMM - commentary - Cramer's Take) exclusive launch of the BlackBerry Storm on the Verizon (VZ - commentary - Cramer's Take)network. No official timeline or price has been released, but early June seems the most likely. On the call, I will be listening for any color around timing and pricing plans for the phone.

Interestingly, Sprint's Boost prepaid platform, similar to MetroPCS's (PCS - commentary - Cramer's Take) prepaid service, seems to be doing OK, but the company could be cannibalizing some of its own sales as customers choose to go with the lower-priced Boost unlimited plan vs. the $99 monthly plan that Sprint offers. Look for firm-wide ARPUs to average about $55, which is down slightly from last quarter.

Overall, I would still stay on the sidelines for right now, but if the company can show that it has indeed made the turn, then I might be willing to get long the name as well.

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At the time of publication, Thomas had no positions in the stocks mentioned, although holdings can change at any time without notice.

Ben Thomas, CFA, is the founder and managing principal of Waycross Partners. Waycross Partners is a long/short hedge fund that focuses on the technology and health care sectors. Before Waycross, Ben was a portfolio manager and senior equity analyst at INVESCO, where he was part of a team that managed over $20 billion in assets. While at INVESCO, he was the lead manager for the INVESCO Midcap Growth fund as well as the firm's senior equity analyst covering technology stocks.

Prior to INVESCO, Ben worked for Banc One Securities and Prudential Securities. He graduated from the University of Kentucky with a bachelor's degree in finance and went on to earn his MBA from Indiana University. Ben is a member of the CFA Institute and serves on the board of directors for the CFA Society of Louisville.