Sprint shares have soared 136.54% over the past 12 months, as bullish analysts wrongly predict the telecom has turned itself around. The only thing that shareholders should expect in 2017 from this beleaguered telecom, however, is a crash to earth. In this overvalued market, you should stick to quality, not take a flier on weak stocks like Sprint.
Sprint's valuation has moved higher over the past 12 months due to ostensibly improved financials, greater subscriber growth and recent profits. Seems like a turnaround is in the offing, right? Don't bet on it.
Let's look beneath the company's accounting legerdemain.
Sprint has a huge off-balance-sheet debt that Japan-based parent Softbank Group (SFTBF) created to keep Sprint's balance sheet weakness from frightening off investors.
Sprint is shouldered with total debt of $37.3 billion, for a troubling debt-to-equity ratio of 196.43, compared to 150.5 for its industry. Sure, this mountain of debt is off the balance sheet, but all of that debt and interest still has to be paid.
The investment herd will soon realize the full ramifications of that onerous debt, as well as Sprint's inability to grow fast enough to service it. When that happens, the stock will collapse. The fact is, Softbank bought Sprint as part of an ambitious but ill-conceived plan to diversify the bank's portfolio. SoftBank clearly must have regrets.
SoftBank in 2013 paid $22 billion for a controlling stake in Sprint, at the time the No. 3 U.S. wireless operator. Since then, the bank's investment has lost $7.3 billion in value, and Sprint has dropped to the fourth-largest carrier.
Sprint faces insurmountable headwinds. It's considerably smaller than telecom rivals AT&T (T - Get Report) and Verizon Communications (VZ - Get Report) and operates an aging wireless network that's difficult to sufficiently upgrade and expand when the company is saddled with such a horrific balance sheet.
A saturated U.S. telecom market and destructive price wars with larger competitors have left Sprint in ruins. Through various unconventional loans brokered by SoftBank, Sprint has been buying time with creditors. But it's simply a matter of robbing Peter to pay Paul.
Meanwhile, Sprint's aggressive promotional programs and discounts to win new customers from rival carriers continue to result in high cash burn and heavy losses.
In a move that bodes poorly for future growth, Sprint decided to forgo the Federal Communications Commission's 600 MHz low-band airwaves auction. Skipping the auction saved precious cash but restricted the company's ability for network upgrades and expansion.
Sprint shares now trade at about $8.44; the average analyst one-year price target on the stock is $7.28, for a projected decline of roughly 14%.
If you own Sprint, disconnect while you still can.
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