Are these telecom stocks ready to rebound or about to sink?

By Chris Lau for Kapitall

It is always a bonus for investors when their shares are ripe for a takeover or an acquisition. That was the case for Sprint ( S) and T-Mobile ( TMUS). When the FCC posted that it did not support the merger between T-Mobile and Sprint, stocks in both companies fell 10.4 percent and 23.9 percent, respectively. The combined company would have had too concentrated a subscriber base. T-Mobile did not fall as much as Sprint, because Illiad (OTC:ILIAF) is also interested in the firm. Why did Sprint decline the most?

Sprint is losing subscribers. The combined company would have shored up the service offering and strengthened the overall subscription base. Instead, Sprint needs to find ways to stem a drop in subscribers, improve its network, and find other ways to monetize its spectrum holdings. With the deal now off, Sprint will now have to spend billions to improve its network. Investors anticipate weak results for the next few quarters.

With the merger deal off, T-Mobile is a competitor for Sprint. The failed acquisition allows T-Mobile to boost its capital expenditure, in a move to improve its network.

Further risks

Price competition could stem further consumer losses at Sprint, but it will also erode earnings. SoftBank, which bought Sprint, anticipates cutting prices to win customers. The firm also has around $31.7 billion in debt against $25.3 billion in equity.

Hidden value

For now, much of Sprint’s value will not be recognized by the market. The firm has a good spectrum, and may optimize the reliability of 3G and 4G.

Investors might want to avoid Sprint at this time, until the dust settles. Short float is at 32.26 percent, and might increase as uncertainty rises. The probability that the stock has more room to fall is high.

Written by Chris Lau

Click on the interactive chart to view data over time. 

1. Sprint Nextel Corp. ( S): Offers wireless and wireline communications products to consumers, businesses, and government users in the United States, Puerto Rico, and the U.S. Virgin Islands. Market cap at $33.13B, most recent closing price at $8.40.

2. T-Mobile US, Inc. ( TMUS): T-Mobile US, Inc. provides mobile communications services under the T-Mobile, MetroPCS, and GoSmart brands in the United States, Puerto Rico, and the U.S. Virgin Islands. Market cap at $23.49B, most recent closing price at $32.31.

Kapitall Wire is a division of New Kapitall Holdings, LLC. Kapitall Generation, LLC is a wholly owned subsidiary of New Kapitall Holdings, LLC. Kapitall Wire offers free investing ideas, intended for educational information purposes only. It should not be construed as an offer to buy or sell securities, or any other product or service provided by New Kapitall Holdings, LLC, and its affiliate companies.

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