Is it possible that Sprint Corp. (NYSE: S) actually is turning the corner on a turnaround that seems to be a decade in the making? If you just looked at the earnings report this week, without comparisons and without reference elsewhere, you might think that Sprint is on its way out of existence. A second look would imply something else. It turns out the that earnings report was better than expected, and having Softbank as a majority holder means there might be some sticking power.
While we have already covered earnings in depth, 24/7 Wall St. wanted to see what some outsiders and analysts had to say about Sprint after its earnings. As a reminder, Sprint shares rose over 18% to $2.99 on Tuesday and was trading above $3.00 early Wednesday.
Sprint’s quarterly report beat the consensus loss estimate by $0.10, and it narrowed its loss substantially in the December quarter. Sprint raised its fiscal guidance for adjusted EBITDA of $7.7 billion to $8.0 billion from a prior $6.8 billion to $7.1 billion.
The company is now projecting full-year operating income of $100 million to $300 million, up from an operating loss of $50 million to $250 million. Management also issued preliminary fiscal year 2016 adjusted EBITDA guidance of $9.5 billion to $10.0 billion, helped by operating cost reductions and moving away from the handset subsidy model.
24/7 Wall St. has seen reports from several outside firms: Argus, Oppenheimer, Wells Fargo, Bank of America Merrill Lynch and more.
Wells Fargo’s Jennifer Fritzsche is one of the biggest Sprint fans out there. Her rating is Outperform and the firm’s official valuation range is $8.00 to $10.00. That is much higher than most. Her view was that total liquidity was $6 billion as of the third quarter, with another $600 million under vendor financing agreements for 2.5GHz equipment and $500 million additional capacity. The network-related financing entity with SoftBank could provide another $3 billion to $5 billion of incremental funding in fiscal 2016.
This is what the Wells Fargo report has to say about its valuation target and thesis behind Sprint:
Our valuation range ($8 to $10) is based on 6.5 to 7.3 times Fiscal 2016 estimates of Enterprise Value to EBITDA (EV/EBITDA). The primary risks to our Sprint thesis include increased pricing pressure and churn due to slowing growth in the wireless business, the rapid decline in wireline voice revenue, and its LTE network build.
We believe Sprint is the most interesting stock on our wireless list right now. We view Sprint’s outlined path for Network Vision very positively. Potential catalysts include: continued M&A potential, margin expansion and deployment of 2.5GHz spectrum.
Oppenheimer’s Timothy Horan removed an effective Sell rating, with the formal upgrade to Perform from Underperform. He liked the improved network data and lower expenses. Horan said:
Sprint reported a solid CY4Q15, with churn of 1.6% versus our 1.7% estimate and a greatly lower cost structure with another $2 billion reduction in expenses in 2016. Free cash flow burn is high at approximately $500 million but should be positive in 2017. Management guided to strong EBITDA growth in 2016 to 2017. Positively, the network is improving, and this should continue, and subscriber trends have stabilized, although with lower average revenue per user and declining prepaid, both of which should persist for another few quarters. Sprint also now has a greatly improved liquidity position (vendor and handset financing). The company also has some price increases kicking in starting in February. We are upgrading S to Perform, and believe M&A is possible. The price increases and expense reductions are positive for the sector.