I know that Sprint Nextel Corporation (NYSE:S) investors likely feel mixed emotions about what is going on with their company. On the one hand, the stock price is up recently on news about Softbank and Dish Network each looking to buy the company. However, what seems to be lost in the shuffle of all of this is, what does Sprint bring to the table in a merger? It seems investors should be more concerned with whether Sprint can be competitive, rather than who will ultimately buy the company.
Don’t Pretend I know that some Sprint Nextel Corporation (NYSE:S) fans believe that they are with the best carrier out there. However, it’s one thing to believe that you are with the best carrier, and another thing to have the data to back it up. The truth of the matter is, Sprint is near the end of a massive transition from Sprint Nextel, to just Sprint. This change was inevitable, and according to the company, should be completed by the end of the second quarter.
This transition has been difficult because it has been painfully obvious that customers didn’t like the change, and Sprint Nextel Corporation (NYSE:S) has been losing thousands of subscribers from the Nextel base. Just for point of reference, the Sprint platform gained 356,000 subscribers, and on the surface, this would have been better than AT&T Inc. (NYSE:T)’s 296,000 wireless postpaid additions. However, Sprint’s performance still would pale in comparison to Verizon Communications Inc. (NYSE:VZ)’s 677,000 postpaid additions. That being said, Sprint’s performance is one thing, but with the company losing 771,000 Nextel subscribers, and 560,000 of these postpaid, the overall subscriber number is down.
There is also the unavoidable issue of cash flow and debt management at Sprint Nextel Corporation (NYSE:S). In the current quarter, the company reported negative core free cash flow (net income + depreciation – capital expenditures) of over $500 million. Even T-Mobile outperformed by this measure, with core free cash flow of about $63 million. AT&T and Verizon are once again in a completely different league, with billions of dollars in free cash flow each.
Where debt is concerned, Sprint Nextel Corporation (NYSE:S)’s shareholders need to pray that one of these deals goes through, because their company’s debt load is simply unsustainable. Using a simple debt-to-equity ratio, Sprint sits at 3.72. T-Mobile is doing better, with a debt-to-equity of 1.71. AT&T’s debt-to-equity of 0.80 and Verizon at 0.48, make Sprint look like the red-headed stepchild of the group.
Let’s Imagine For A Minute If you are a Sprint investor and you don’t already know the above numbers, I would suggest you sell immediately. However, if you are an investor and you are willing to accept that Sprint has a future, the obvious question is, what does that future hold?
First, assuming either an investment by Softbank, or an outright buyout by either Softbank or Dish, Sprint Nextel Corporation (NYSE:S)’s debt issues may or may not be cured. An investment by Softbank would seem to make the most sense, as theoretically this investment would directly retire some of Sprint’s gargantuan debt pile. A buyout by Dish offers no such solution, and if you look at the deal it downright stinks.
Second, Sprint’s aforementioned elimination of the Nextel network should lead to real subscriber additions. The Sprint network’s performance has been okay, but the losses at Nextel have been too much to overcome.
Third, Sprint Nextel Corporation (NYSE:S) is benefiting from its unlimited everything offerings, as 86.1% of the company’s postpaid subscribers bought smart-phones. While it’s true that smart-phones have higher subsidies, they also increase long-term revenue. A significant development in Sprint’s smart-phone strategy is the iPhone. Say what you want about Apple Inc. (NASDAQ:AAPL)’s device, but Sprint sold 1.5 million in the last quarter, and 43% were to new subscribers.
The bottom line is, Sprint has a lot of challenges today as a stand-alone company. It seems all but assured that the company will be bought. For investors, what you should do depends on your outlook. If you bought for a short-term trade and have profits, I would take them today. If you like the idea of a stronger Sprint Nextel Corporation (NYSE:S) (through Softbank), then hold on and see how things play out. However, if you think a combination of Sprint and Dish will be a real threat, I would say think again, the numbers just don’t look good. To keep up with what’s going on with Sprint, just add S to your personalized Watchlist on Fool.com today.
Chad Henage owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned.
The article Ignore The Buyout Talk, Can This Company Compete? originally appeared on Fool.com.
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