Core Concepts: Telecom Bargains

The business is reasonably stable, and the free-cash-flow stream is robust. If management fulfills its promise to use cash flow to materially reduce debt, this stock might be worth 1.5 times sales in four to five years. That equates to a $75 to $80 stock quote, up from a recent $55. Couple the potential stock appreciation with a 3.6% dividend yield, and the potential total return is reasonably attractive.

Sprint Nextel: The Best Big-Cap Bargain

At $17.80 per share and with a $51 billion market cap, Sprint Nextel is the most compelling bargain among big-cap stocks. After years of higher-than-normal capital expenditures, cash flow is poised to soar. Because depreciation exceeds capex, this is a cash-flow story -- specifically, a free-cash-flow story. By my calculations, net free-cash-flow margins can reach 20% in four to five years (perhaps a bit sooner) on an annual sales base of $55 billion to $60 billion.

In addition to this capex-vs.-depreciation disparity, a number of crosscurrents in this story make it interesting -- and complex. There are issues concerning customer churn, marketing efficacy and customer service. A wild card that is impossible to game at this early stage is Sprint Nextel's leadership role in the development and rollout of WiMax networks.

If the stock stays at current depressed levels, lately below $20, it's fair to say that management should consider implementing a major share-repurchase program. Currently, balance-sheet leverage is modest relative to the company's ability to generate free cash flow.

At a minimum, I calculate a fair value for this stock of 2 times sales, or $45 per share, in 2010, and an argument could be made for a valuation of 3 times sales, or $65 to $70 per share.

That's just the kind of undiscovered value I've been looking for.