Sprint’s CEO Says The Stock Is A Buy

Sprint Nextel Corporation (NYSE:S) has risen about 135% year to date as the market has become less worried about the company’s prospects, which were challenged by the recession (the stock is still down by about two-thirds from five years ago). The company’s CEO, Daniel Hesse, seems to think that investors are still undervaluing Sprint: he recently disclosed a direct purchase of 20,000 shares on October 26th at an average price of $5.53 per share. This is only a small increase in his total holdings, but it’s still notable to see an insider purchase.

Insider buys are statistically associated with later increases in the stock price (read more about studies on insider purchases and sales) and we think that this is because they demonstrate confidence in the company- an insider must be very bullish in order to buy more shares rather than diversifying. Hesse had previously purchased 50,000 shares in April at an average price of $2.38 per share, and 100,000 shares in November at an average price of $2.82. With the rise in the stock price since those buys, we estimate that he has made over $400,000 from these two investments.

Sprint Nextel Corporation recently released its results for the third quarter of 2012. Revenue was up 5% compared to the third quarter of 2011, in line with the company’s performance in the first half of the year versus the same period last year. However, Sprint continued to take operating losses as well as net losses. The company does have some strategic advantages in the marketplace, including pricing and customer service, and the losses that the company experienced were not as great as it had seen earlier in the year. Sprint’s free cash flow was negative as the company spent big on capital expenditures in the quarter.

David Einhorn

Wall Street analysts expect $1.49 per share in losses for the full 2012 year and 83 cents per share in losses next year; while the company has beaten earnings estimates in the last few quarters, it does look like investors would have to wait a considerable amount of time to see profitability. Of course, the stock price would still increase with positive developments in the company’s progress, and that appears to be what Hesse expects. Billionaires David Einhorn and Leon Cooperman managed hedge funds which had large positions in Sprint at the end of June. Einhorn’s Greenlight Capital owned over 72 million shares of the company (find more stocks that David Einhorn likes) while Cooperman’s Omega Advisors increases its stake in Sprint Nextel Corporation by 34% to a total of 43 million shares (see more stock picks from Leon Cooperman).

Sprint is best compared to Verizon Communications Inc. (NYSE:VZ), AT&T Inc. (NYSE:T), MetroPCS Communications Inc (NYSE:PCS), and Nokia Corporation (NYSE:NOK). The two large telecoms both have trailing P/E multiples in the 40s, though sell-side analysts expect that their earnings numbers will be much better in 2013; Verizon’s forward P/E is 16 while AT&T trades at 13 times forward earnings estimates. With each company paying a high dividend as well- close to 5%- that forward multiple is appealing but we don’t want to depend on such rapid growth.

Nokia, similar to Sprint, is looking at unprofitability both this year and in 2013. It also reported a decline in revenue in the third quarter of 2012 compared to a year ago. It does have a high trailing dividend yield, but its payments aren’t steady and so we wouldn’t want to depend on its future payments being in line (particularly with the decline in business). MetroPCS looks the best on a quantitative basis: its trailing and forward P/Es are 12 and 14, respectively. It also had its revenue come in modestly higher in its most recent quarter versus a year earlier, which drove earnings up strongly. We’d want to look at the company more closely, but from a distance it appears to be the best value of its peers.

It’s good to be aware of the CEO’s purchase at Sprint, but we still don’t feel comfortable getting into a company that is still a good ways out from generating earnings. While we’re skeptical of most of Sprint’s peers as well, it does look to us like MetroPCS is a better buy.

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