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| Up, up and away! Shares of Sprint Nextel have surged during the past year while the Baby Bells have struggled. |
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| * data as of 8/22/05 | | Source: Thomson/Baseline |
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NEW YORK (CNN/Money) -
Sprint Nextel, the company created from the merger of the two wireless giants, has assumed the old ticker symbol of Sears, the single-letter "S."
The 19th letter of the alphabet is apt since it is also the symbol of Superman...and Sprint Nextel has certainly been the super hero among telecom stocks lately.
Shares are up 7 percent this year and 40 percent during the past 12 months. Compare that to the three major Baby Bells. BellSouth (Research), SBC Communications (Research) and Verizon Communications (Research) are all down year to date and during the past 52 weeks.
Will Sprint (Research) continue to be the darling of the telecom sector? Several analysts think so.
Wireless pure play
For one thing, Sprint now has the most exposure to the wireless market of any major telecom. And it will be spinning-off its slower growth local-service division sometime next year.
As such, its earnings are expected to increase 34 percent this year and 14 percent, on average, for the next five years. That's significantly higher than the growth rates of the Baby Bells (also known as Regional Bell Operating Companies, or RBOCs).
"I would recommend Sprint over the RBOCs right now," said Greg Gorbatenko, an analyst with Marquis Investment Research, an independent research firm. "What's your pure play in wireless? It's Sprint."
The spin-off will also help make Sprint Nextel a stronger company financially. The two companies, prior to the merger, had about $24.7 billion in combined debt. But Sprint Nextel plans to pass on about $7.25 billion of its debt load on to the local-service business.
Another analyst thinks that Sprint is poised to benefit as cable companies, which are aggressively battling the Baby Bells for customers, seek to launch their own brand of wireless services.
Here's why.
Cable companies don't have access to their own wireless networks. So they'll need to partner with someone to sell wireless service. It seems unlikely that the cable companies would want to strike a deal with their top rivals.
But Sprint Nextel would be a different story since they are not fighting the cable companies over high-speed Internet access and video services to the home.
What's more, Sprint also has specialized in wireless wholesale agreements, selling the rights for other companies to use its wireless network in exchange for a cut of revenues. Sprint already has wholesale deals in place with Virgin Mobile and Qwest (Research) and recently agreed to a deal with Walt Disney (Research) to launch a Disney Mobile service next year.
"Cable companies will want to get into wireless and the only way to get into it is probably through Sprint Nextel," said Patrick Comack, an analyst with Zachary Investment Research, an independent telecom research firm. "And Sprint Nextel has the leverage because the cable companies don't have distribution."
Concerns about affiliates but stock is reasonably priced
Of course, Sprint Nextel is not without its risks. Gorbatenko said Sprint needs to make sure that it does not alienate the loyal, and highly profitable customers of the Nextel walkie-talkie like service. He sees the fact that the Nextel name is not going away as a good sign, especially since competitors now also offer similar "push-to-talk" products.
"It's pretty smart to keep the Nextel brand. Customers could go to Cingular, T-Mobile, Verizon so it's best for Sprint to keep Nextel users happy," Gorbatenko said.
There's also the issue of Sprint and Nextel affiliates, smaller wireless companies that offer services under the Sprint or Nextel name, seeking buyouts.
Shares of one such firm, Nextel Partners (Research), have surged nearly 40 percent this year on the hopes that Sprint Nextel, which already owns 32 percent of the company, will buy the rest.
But Sprint Nextel is apparently not interested in buying the company at what the market is now valuing it at, and recently said it wants an appraisal of Nextel Partners to determine fair market value.
Sprint has already agreed to buy one of its own affiliates, US Unwired, in July for $1.3 billion. US Unwired had threatened to sue to stop the Nextel merger, claiming that the merger would violate exclusive non-compete clause US Unwired had with Sprint since Nextel operates in many of the same markets as US Unwired.
And Sprint has several other affiliates, including Ubiquitel (Research) and Alamosa Holdings (Research), which might want similar deals. Shares of Ubiquitel are up nearly 15 percent this year while Alamosa Holdings has surged about 33 percent.
So Sprint Nextel may have to pony up a couple more billion to gain full control of its affiliates. But SG Cowen analyst Thomas Watts wrote in a report on Tuesday that these deals shouldn't have a meaningful impact on Sprint Nextel's bottom line. He added that a resolution of the affiliate situation would probably be viewed as a positive catalyst.
What's more, Watts wrote that the likelihood of positive earnings revisions and the announcement of cable wholesale agreements could also bolster the stock.
That just leaves the valuation question. Since Sprint has vastly outperformed its peers, is it still worth its current price? It looks that way.
The stock trades for 17.5 times 2005 earnings estimates, which isn't that big of a premium to the Bells. Verizon trades at a P/E of 13 while SBC and BellSouth sport a multiple of about 15.5. "What investors want right now is growth and the price for Sprint is reasonable," said Gorbatenko.
Some might even say that Sprint Nextel is a Super bargain.
For a look at more telecom stocks, click here.
Are companies with one-letter ticker symbols cursed? Click here.
For more about personal technology, click here.
Analysts quoted in this story do not own shares of Sprint Nextel and their firms have no investment banking relationships with Sprint Nextel.
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