The Driving Force Behind a 50% Rally in Sprint Shares

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Sprint Corp. (NYSE: S) has quietly gone from a struggling second-tier mobile phone carrier to a massive stock performer. How many other mobile carriers can say that their stock has risen 40% to 50% in just about two weeks?

The problem with trying to analyze Sprint shares is that the company’s path to profitability is as much of a mystery as how it will deal with its mountain of continually growing long-term debt. Still, when an actively followed company like Sprint’s stock price rises from $3.15 to $4.70, it is hard to not notice.

It was back on August 6 that 24/7 Wall St. featured a report on just what exactly might make Sprint profitable again. After looking at the earnings, the verdict was as follows:

While Sprint beat the expectations of Wall Street analysts, taking a closer look at its financial statements yields an uglier picture. In the most recent quarter, Sprint’s revenue declined 9% year over year. Its net income swung to a $20 million loss from $23 million in net income the same time last year. Sprint’s free cash flow deficit widened 355% from the same time last year.

Now let’s consider that Sprint carries almost $33 billion in direct long-term debt. That figure is without even considering almost $4 billion in “other” liabilities and almost $14 billion in deferred long-term liability charges. Tally it all up and you end up with about $50 billion in total long-term liabilities. It isn’t pretty.

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The latest driving force for Sprint’s gain is of course a new plan tied to the iPhone. Sprint’s release on Monday shows that new or existing upgrade-eligible Sprint customers can get in on the iPhone Forever plan. This is for only $22 per month — or $15 per month with a smartphone trade-in.

If you have another plan at another carrier, Sprint now said that it will pay off your old phone and contract so you can switch.

Evaluating a company with this much debt is hard to do. Sprint is just about to no longer have expenses tied to the old Clearwire system for wireless Internet. Still, it has only about $35 billion in revenues, and it is very hard to consider how to chip away at a mountain of debt that is about 50% higher than your annual revenues. Now throw in a four-way price war and a regulatory environment in which regulators want four carriers rather than three, even if one cannot operate profitably.

Another recent driver of Sprint shares was news that Softbank’s Galaxy Investment Holdings subsidiary bought another 22,873,301 shares for roughly $87 million. That sounds very small, but maybe this means that Softbank is going to keep Sprint afloat at all costs.

What else has to be considered here is that Sprint’s most recent short interest reading from last week, based on a July 31 settlement date, was back up in the stratosphere. That short interest was up over 127 million shares, double from where it was on April 30, and the sixth consecutive gain in the short interest.

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Sprint is also aggressively trying to finish that roll-out of the “store within a store” model in the RadioShack locations.

All in all, it is hard to account for a move from $3.15 to $4.60 in just eight sessions. And the shares were then seen up 12% at $4.74 in morning trading on Monday — making the move 50% in that eight sessions.