How Can Sprint Be Rated "Outperform"?
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:
- 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.
- The probability that Sprint will get the iPhone.
- 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.
- 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.
- Expectation" should read "hope."
- 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?
- 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?
- 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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