How Can Sprint Be Rated "Outperform"?

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The deck is stacked against Sprint Nextel's (NYS: S) survival. At least that's the way I see it. So I was quite surprised to read that RBC Capital Markets had upgraded Sprint's rating late last month to "outperform."

That reappraisal came about from several RBC assumptions:

  1. An expectation that Sprint will gain postpaid subscribers in the second half of 2011, turning around the company's losing performance in the first half.
  2. The probability that Sprint will get the iPhone.
  3. A whittling down of its money-losing iDen push-to-talk service (acquired with the 2004 Nextel purchase) while transferring to Sprint's own CDMA network - but not until 2013, at least.
  4. A belief that AT&T's (NYS: T) acquisition of T-Mobile will actually improve Sprint's position.

Back to reality
Let's address each of those four points.

  1. Expectation" should read "hope."
  2. Even if it was definite that Sprint would get the iPhone, unless the Sprint network could add extra value to the iPhone experience, why would subscribers switch carriers?
  3. Sprint's rationale for buying Nextel -- besides adding subscribers, of course -- was to create efficiencies of scale by merging both companies' networks. Instead, merging Sprint's CDMA and Nextel's iDen networks was a complete mess, and the ensuing inefficiencies caused massive subscriber losses. Will Sprint even still be around in 2013 for the new push-to-talk network?
  4. Let me see if I understand this: With T-Mobile no longer there as Sprint's main low-price rival, the pressure to add subscribers just disappears? No, I think that's when the pressure to add subscribers increases quite a bit.

That last bit reminds me of a scene from Monty Python and the Holy Grail. The Black Knight blocks King Arthur's way until Arthur chops off the Knight's last remaining limb.

Black Knight: "I'm invincible!"
Arthur: "You're a loony."

Alternative business plans
With AT&T and Verizon (NYS: VZ) likely to become the only viable major wireless carriers in the United States if the AT&T-T-Mobile merger goes through, Sprint's situation becomes more dire. I see only three alternative scenarios that may benefit Sprint.

  • First, the AT&T merger is rejected. AT&T and Verizon will keep battling each other, and Sprint and T-Mobile fight over the scraps.
  • Second, the merger is rejected and Sprint merges with T-Mobile. This would create a more viable third major carrier -- though headaches caused by differing technologies would once again limit the effectiveness of such a deal.
  • Third, the merger goes through but then Sprint is acquired by Verizon. I don't think this would benefit the consumer.

The only thing I can't see happening is a company like Sprint Nextel, with 14 straight quarterly losses and a weak outlook, getting an upgrade from any brokerage. But then I'm not a Wall Street analyst.

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At the time this article was published Fool contributorDan Radovskyowns shares of AT&T.Motley Fool newsletter serviceshave recommended buying shares of AT&T. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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