Spring (S) is an interesting company and an even more interesting stock. One of the smallest and least exciting carriers in the telco space, it receives little attention relative to T-Mobile (TMUS) or Verizon (VZ), which represent the new guard and old guard respectively. Yet the stock is up 94% in 2016, a year that has been incredibly kind to telco stocks.
Furthermore, its strength isn’t declining. While AT&T (T) and Verizon have gone off 52-week highs, Sprint reached its 52-week high last week. It’s been going up solidly all year, including a big spike in the summer. This has brought growing attention from analysts, which in turn has brought the stock higher.
Last week’s action is the latest of this trend. Sell-side analysts suggested that Sprint’s share of the usable spectrum for cell phone service is itself worth $21 per share. That’s triple the stock’s current price. And, yes, the analyst who made this valuation took into account the company’s $32 billion in debt, and is based on the company’s most recent mortgaging of 14% of its spectrum for $16.4 billion, initially raising just $3.5 billion.
High valued spectrum could offset troubling numbers in the company’s financial statements, which are the real cause of the stock’s long-term decline. Even after nearly doubling in 2016, it’s still down from its all-time high in 2013 and is up only 9% from its IPO in 2013, massively underperforming all peers and the market as a whole.
Here’s the bad news: the company’s profit margin is negative and has remained so for over 5 years. The company’s operating margin briefly goes over 0%, but barely so. The company has $59 billion in debt versus $79 billion in assets—a high ratio for a firm that keeps losing cash. Revenues have fallen every quarter since the last quarter of 2014. EPS has only been positive once (Q2 of 2014) since its IPO. With all these bad financials, valuing the company is no longer as simple as looking at the spectrum itself.
And looking just at the spectrum is a tad insulting and itself quite negative on the stock. Sprint’s value proposition to shareholders is to create value on that spectrum—to employ it and create a marketable product that provides value to people and causes its market share to grow. That is not happening—Sprint has been getting smaller.
That recently turned around—but slightly. Sprint saw 173,000 net subscriber adds for its postpaid cellular service in FQ1 of 2016, which was its 4th quarter of such growth. That’s good and promising, but still very small.
Which leads us to the next question: what is the thesis behind owning S? Either investors are buying it on the value of the spectrum or they’re buying it on the value of the business model. If the former, they need to be sure that the business model doesn’t deplete the value of the spectrum by burning cash on a negative profit enterprise. If the latter, they need to be sure there is reason to believe management can and will make a turnaround to the company’s business growth somehow. These questions do not have easy answers, but they need to be answered before deciding what to do with this stock.