|Sprint's network upgrade is a high-risk strategy.|
High Debt Might Derail the StockSprint already has a highly leveraged balance sheet, with net debt of $11.4 billion compared to a market cap of merely $7.2 billion. The announcement that it will likely need to raise more capital to fund the LTE will make the balance sheet even less attractive. While we believe that the market's response has been somewhat exaggerated, it is not entirely unwarranted. If we tweak the Trefis model for Sprint to include increasing capital expenditures in the next five years, we can see that the stock price forecast plummets, showing a high sensitivity to capital expenditures.
LTE, Network Modernization PlanCurrently, Sprint's WiMax network is being provided by Clearwire ( CLWR). By chalking out a plan to spend on its own network and gradually phasing out Clearwire, Sprint's management has indicated that it believes this will decrease the operating costs of wireless data transmission. To understand the upside potential this presents, this move should be viewed in conjunction with the company's Network Vision Project that will eliminate one of the two discrete networks the company operates, cutting costs substantially, as well as the recently announced plan to provide iPhone users with unlimited data plans. The margins on unlimited data plans are usually lower, but the decreased network costs will enable the company to provide these plans without taking a long-term hit to margins. If successfully implemented, this should translate into increased market share in the wireless market with little to no impact on margins.
Sprint is treading a very fine line here by betting on its own LTE network and the iPhone deal. If the company is able to lure iPhone users with its unlimited data plans and at the same time increase speeds and eventually cut costs by using its own 4G network, the long-term prospects look good.However, the significant debt balance leaves the company with little room for error. In light of Friday's selloff, our $4.75 price estimate for Sprint's stock is about double the market price. Like our charts? Embed them in your own posts using the Trefis Wordpress Plugin.