Sprint Nextel (S) Shareholders Warned of Potential Bankruptcy

Few stocks have fallen as far from grace as Sprint Nextel (S: Charts, News). The wireless provider was once an industry bellwether, trading above $70 per share at the turn of the century. Five years ago, many analysts believed that the stock was undervalued when it was trading at $22.

Today, shares are fetching barely more than $2 per share. This week, shell-shocked Sprint Nextel investors were slapped with even more bad news. Research firm Sanford C. Bernstein cited a "possible bankruptcy" as a "very legitimate risk" for current shareholders. As a result, shares slid nearly 5% during Monday trading. What happened to this once dominant wireless provider, and is there still any hope left for shareholders? Daily Chart
Last October, Sprint made a risky bet on Apple's (AAPL: Charts, News) iPhone. The company agreed to purchase 30.5 million iPhones over the next four years at $600 apiece - a long-term investment of over $15.5 billion. Sprint then attempted to sell these iPhones at retail prices, which start at $199 with a two-year contract. In desperation, Sprint took a massive loss upfront in order to carry the iPhone 4S, the cost of which it must slowly earn back through user contracts. At the time, Sprint stated that the iPhone would eventually comprise 24% of the company's total revenue over the next four years. By comparison, AT&T (T: Charts, News) earns approximately 39% of its revenue from the iPhone. To attract more customers, Sprint is offering the most generous data plan in its industry, which may raise data traffic costs and cut into margins this year. Sprint's upcoming divorce from longtime partner Clearwire (CLWR: Charts, News) has also put pressure on the company's bottom line. Sprint currently purchases its 4G WiMax network wholesale from Clearwire, but it has announced that it plans to build its own 4G network over the next two years, a venture which will cost approximately $10 billion. This expensive project, dubbed the "Network Vision Project", aims to cover six major U.S. cities with its 4G LTE ("long term evolution") network by the middle of the year. Meanwhile, AT&T and Verizon (VZ: Charts, News) are rolling out their own 4G networks, which will arrive later than Sprint's, but will operate at higher speeds. Meanwhile, Sprint is also "spectrum-contained" - required to serve existing 3G iPhone customers while upgrading its own networks. This project has weighed heavily on both Sprint and Clearwire stock. Due to its more generous data plans, Sprint will have to upgrade its network quickly and efficiently to compete with the expansive networks of AT&T (T: Charts, News) and Verizon (VZ: Charts, News) Wireless. Bernstein analyst Craig Moffett believes that the company is careening dangerously close to the edge of bankruptcy with its current plans. "To be clear, we are not predicting a Sprint bankruptcy," stated Moffett. "We are merely acknowledging that it is a very legitimate risk." Moffett places the chances of a bankruptcy at 50% - a figure that has alarmed many investors. Moffett notes that Sprint's "suffocating" contract with Apple only benefits the latter, and that Sprint would be hard pressed to break even on the deal. Moffett also believes that the company's confusing 4G offerings - a mix of Clearwire's and its own - will confuse and alienate smartphone customers. Newer 4G-enabled smartphones from other companies - such as Samsung, HTC, Motorola (MMI: Charts, News) or Sony (SNE: Charts, News) - might also have compatibility problems with Sprint's unique brand of 4G. Lastly, Sprint has $1.8 billion in debt maturing through the end of 2013, which will be followed by $1.4 billion in 2014 and $2.6 billion in 2015. This could result in severely decreased cash flow for the company at a time when it may need it the most. Sprint's current cash flow for the next two years is already severely crimped at negative $5.7 billion, due to its ongoing network expansion. While Sprint may survive, or even profit, if it hits all its targets, any slight miscalculation or deviation could result bankrupt the company, wiping out all prospective shareholders who think the stock is a bargain. Other News About S Sprint: Bernstein Cuts to Sell on iPhone LTE Prospect Sprint gets downgraded to "Sell" by Bernstein. Sprint: Bernstein Cuts Rating; 50% Chance Of Bankruptcy? Another article on Sprint's chances of bankruptcy. Other Stocks in the News UPS agrees to buy TNT Express for $6.7B UPS expands with a big acquisition. 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Published on Mar 20, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2016. Content published with author's permission.

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