In a year when cable and telecom utilities have came back into favor,
The company posted third-quarter results Oct. 26. Profit grew 7% from the previous year to 32 cents a share, which was a penny below analyst estimates. In fact, the company has consistently missed earnings expectations since Sprint and Nextel combined in August 2005.
That said, the stock has rebounded 28% from its August lows, closing Tuesday at $20.44. With that in mind, I'm here to answer investor's questions: Should I do it? Can investors gain by investing in Sprint Nextel now, or is it best to pass on this big telco?
The company's main problem has been customer retention. Sprint Nextel's subscriber turnover rate (otherwise known as churn) was 2.4% in the third quarter, which was twice as high as
Sprint also added just 233,000 customers during the quarter, while Verizon added 1.75 million new users. Sprint is the third-largest domestic wireless provider and Verizon is second in total number of subscribers, behind Cingular.
On the latest quarterly conference call, management said that customers didn't like the company's new phone offerings, which were more expensive. Meanwhile, revenue growth is decelerating, and Sprint Nextel's gross margin has been declining.
By offering less-expensive phones, the company is likely further sacrificing margin by subsidizing more of the equipment cost to draw in new customers. Management also has increased spending to build out its network, and Sprint Nextel spends about $7 billion a year on capital expenditures.
Another reason Sprint's stock has been hot lately is the takeover speculation surrounding it. One rumor has the company as a potential acquisition target of cable leader
, while another suggests that a few of the top private equity giants may try to once again set a new record for a leveraged buyout.
proposed $83 billion purchase of phone operator
has already come under heavy scrutiny from the Federal Communications Commission and several other government agencies.
Sprint Nextel isn't much smaller than BellSouth, currently sporting a $59 billion market cap, so a purchase by Comcast likely would not go unchallenged by the government.
At the end of the day, I believe that readers should not buy shares in Sprint Nextel at current levels. The stock is pricing in a takeover that doesn't appear likely, and a fundamental turnaround that would take more than a quarter or two to execute. With that in mind, I believe Sprint Nextel could trade back down toward $18 a share over the coming months.
If the company has improved its churn rate by then and shows it can reignite subscriber growth without sacrificing margins, I believe the stock would be attractive to purchase under $18.
David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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