Sprint: The Worst Has Not Yet Been Seen (S, T, VZ, LEAP, PCS, AAPL, CLWR)

The intensely competitive wireless sector showed some additional blood-letting this week when Sprint Nextel Corporation (NYSE: S) announced second-quarter earnings.  The shares closed down 16% at $4.34 after being down as much as 20% and things are worse again today.  The move actually shows strengths of AT&T, Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), while highlighting both Leap Wireless International Inc. (NASDAQ: LEAP) and MetroPCS Communications, Inc. (NYSE: PCS).

Sprint is the country’s No. 3 wireless carrier with a market cap just shy of $13 billion.  The company’s second-quarter results were disastrous.  Posting a net loss of $847 million or $0.28 per share, the company exceeded the $760 million loss or $0.25 per share a year ago.  The loss dwarfed analysts expectations of minus $0.12 per share.  Sprint’s current return on equity is a negative 19.4%.  The stock is down another 2% going into the weekend at $4.23 and its 52-week price range is $3.70 to $6.45.  It is always easy to blame a weak stock market, but Sprint is trading as though the worst is yet to come if you just look at this awful stock chart from stockcharts.com.

The company faces a particularly challenging marketing situation since Sprint and T-Mobile are the only two U.S. wireless carriers not offering the iPhone from Apple Inc. (NASDAQ: AAPL).  The lack of Apple puts Sprint at a strategic disadvantage.  Sprint lost 101,000 customers during the quarter just ended and 114,000 in the previous quarter.

Sprint Nextel has announced that it will be building and operating the national wireless broadband network for LightSquared, the hedge fund backed startup.  The company hopes to the LightSquared transaction will add $9 billion to its revenues over 11 years.  While the deal would be a distinct positive for both companies, funding for the long-rumored service opportunity is less than certain.

AT&T, Inc. (NYSE: T), with an acquisition of T-Mobile in the offing, has a market cap of $173 billion.  Its forward price earnings multiple is 11.5 and its return of equity (ROE) of 18.3%.  The shares recently closed at $29.26 its 52-week price range is $25.79 to $31.94.  Based on relative strength and consensus analysts’ opinions, AT&T would appear one of the more attractive plays in this intensely competitive sector once overall market conditions improve.   T-Mobile is in the process of being acquired by AT&T, a move that is only going to puts Sprint further back in the field if the merger is allowed.

Verizon Communications Inc. (NYSE: VZ) has a market cap of $101 billion making it the country’s second largest wireless carrier.  The company has a forward price earnings multiple of 13.7 and a return of equity (ROE) of 12.9%.  The shares recently closed at $35.66 its 52-week price range is $28.61 to $38.95.

Leap Wireless International Inc. (NASDAQ: LEAP) and MetroPCS Communications, Inc. (NYSE: PCS) look like they need to merge even more than ever, even if they could not get a deal done before when share prices were higher.  Leap has a market cap of $1.04 billion. The company will report second-quarter earnings on August 3rd.  Analysts look for a second-quarter loss of  $0.50 and a third-quarter loss of $0.47.  Consensus estimates project continued losses of $2.91 for FY 2011 and $1.12 for FY 2012.  LEAP currently posts a negative return on equity of 61.67%.  The shares recently closed at $13.25 its 52-week price range is $9.51 to $17.66. MetroPCS has a market cap of $5.8 billion, a forward price earnings multiple of 12.2 and a return of equity (ROE) of 9.15%.  The shares recently closed at $16.29 its 52-week price range is $8.25 to $18.79.   Five-star analysts’ opinions place MetroPCS among the more attractive plays in this intensely competitive sector once overall market conditions improve.  Sprint’s acquisition of Virgin Mobile should have pressured these two merge again, but little has been seen on that front.

So, what options does Sprint truly have?  The 4G phones from Samsung are losing some of the competitive advantages, and frankly people wanted the iPhone any way.  The walkie-talkie features are another move from yesteryear.  Maybe Sprint can unlock some value in Spectrum.  Its old effort with Clearwire Corporation (NASDAQ: CLWR) was not exactly a huge success, particularly if you count the $2.22 share price from Clearwire.  The obvious move is that Sprint has to go in and get Apple to open up to a third carrier.  Sprint actually has more than enough spectrum, and it would bring back the interest in the company.  Apple just hasn’t wanted to go there yet.

What is so interesting is that Sprint has long been considered a merger candidate by many turnaround and speculative investors.  The acquisition of T-Mobile arguably takes away this argument, but that really depends upon your stance.  It is going to take a miracle to fix Sprint.  President & CEO Dan Hesse has a great reputation in the wireless industry, but the workaround for Sprint may have just proved to be too much to ask even if many of the legacy issues and decisions were not made by him.

As of today, it really appears to be a situation that hope and prayer are Sprint-holders’ top aspirations.  There is nothing wrong hope and prayer, but they make for very poor primary business strategies without any action of substance to help out.

If the market does not get a handy recovery soon, it should be no shock to anyone if Sprint Nextel shares start to challenge the 52-week lows.

Jon Ogg & Jim Berdou