Sprint Outlook Drags Down Wireless Sector

Updated from 11:06 a.m. EST

Heavy selling in Sprint PCS (PCS) was dragging down the wireless sector Tuesday as concerns grew about subscriber growth and the industry's financial outlook.

Sprint was down $3.26, or 27%, to $10.60 in recent trading, while Sprint Corp.(FON), Sprint's non-wireless division, was down $1.75, or 11%, to $14.27. Shares of both companies were at all-time lows.

Both Merrill Lynch and Morgan Stanley downgraded Sprint PCS this morning after Monday's warning. Merrill downgraded the wireless operator to neutral from strong buy, and Morgan Stanley lowered its rating to neutral from buy.

Sectorwide

Also falling Tuesday were Triton PCS(TPC), down $1.38, or 13.5%, to $8.82; Airgate PCS, down 76 cents, or 5.4%, to $13.26; Leap Wireless(LWIN), down $1.20, or 12.5%, to $8.40; AT&T Wireless(AWE), down 82 cents, or 8%, to $9.30; and Western Wireless(WWCA), down 81 cents, or 8%, to $9.33.

Nextel Communications(NXTL) touched $4.74, down $2.05, or 30%, but was fighting back after updating its fourth quarter and 2002 subscriber guidance. The company said it added 501,000 new subscribers in the fourth quarter, bringing full-year additions to the high end of previous guidance, and predicted 2 million new subscribers in 2002. Nextel also tried to quell concern about a recent SEC filing by its NII Holdings unit, in which it said it was in talks to restructure its debt.

The company said the debt was "non-recourse" to Nextel Communications. It said that Nextel's domestic business plan is currently fully funded, and that the company in full compliance with all debt and bank covenants. "In addition, we anticipate full compliance with all domestic covenants for the foreseeable future." The shares were recently down $1.16, or 17%, to $5.65.

Anemic Growth

After the market closed Monday, Sprint said 2001's bumper crop of subscribers would be followed by a fall-off in 2002. The network operator finished 2001 with more than 4 million fresh faces in its ranks. Monday after the market close, Sprint PCS tempered previous estimates that it could sign up 3.6 million to 3.7 million customers in 2002 and pegged that number at 3 million.

The carrier fell short, as it had forewarned, of its subscriber estimates for the fourth quarter, enrolling 1.1 million customers instead of the 1.3 million it had aggressively targeted. In the third quarter, Sprint PCS shocked the Street by signing up 1.2 million subscribers, 400,000 more than analysts had expected. But as we heard from Verizon Wireless (VZ), Cingular and to a lesser extent AT&T Wireless, the fourth quarter brought an end to the U.S. wireless market's 2001 hot streak.

Last week AT&T Wireless signaled that instead of the 3 million customers it garnered in 2001, 2002 would reap closer to 1.98 million to 2.52 million callers, a 16% to 35% deterioration in estimates. On Monday, Sprint PCS explained that its new outlook was devised using new industry sign-up projections of 17 million for 2002, instead of 22 million that preceded the weak fourth quarter. Verizon Wireless, the combination of several wireless networks, saw its customer additions fall from 3.7 million in 2000 to 2.79 million in 2001 and was quiet about wireless subscriber prognostications in its 2002 outlook.

Investors need not despair, however: Sprint PCS expects to double EBITDA in 2002, further capitalizing on its huge customer base. AT&T Wireless plans to grow its earnings before interest, taxes, depreciation and amortization 30% in the full year 2002, after 65.4% growth year over year in 2001.

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