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Sprint Nextel Corporation (S): Is This Stock Still the Best Telecom Opportunity?

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Sprint Nextel Corporation (NYSE:S)For more than a year, no one was more bullish on Sprint Nextel Corporation (NYSE:S) than myself. In 2012, I chose Sprint as my “Value of the Year” and then stood by that decision as the stock hovered at $2.3 for the first five months of the year. However, like any good investor, reassessing a position is vital to any sustained success. Therefore, is Sprint Nextel Corporation (NYSE:S) still presenting the best value in the telecom space?

What made it great?

When I chose Sprint as my “Value of the Year” it was based on very simple logic. At the time, Sprint Nextel Corporation (NYSE:S)had traded from $5.5 to $2.2 with a downtrend in the market.

First, I believed that the market would recover. But secondly, I believed that if Sprint was worth $5.5 in the right market environment without the iPhone, it was worth a whole lot more than $2.2 with the iPhone.

At the time – the end of 2011 – the iPhone was the hottest product in technology and was arguably the separation between Sprint Nextel Corporation (NYSE:S) and Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T). Sprint did not have the product that all consumers wanted, the iPhone, therefore it could not compete.

Thus, when the company earned rights to the iPhone, and its stock was trading at $2.3, it seemed logical that the company could then become more competitive and could perhaps gain new subscribers along with finally stopping the trend of falling revenue. Turns out, this logic proved true.

What is different?

The problem is that at $6.7, Sprint Nextel Corporation (NYSE:S)’s valuation has changed. Apple’s iPhone is no longer growing at 25% year-over-year and is now producing near flat growth in the U.S. Sprint is no longer presenting such clear and obvious value, and its chief problem of operating with too many assets relative to its subscribers still leaves the primary question of whether the company can ever achieve profitability?

Sprint AT&T Verizon
Price/Sales 0.55 1.52 1.23
Revenue Growth (last quarter) 0.5% (1.5%) 4.2%
Forward P/E Ratio N/A 13.22 15.52
Operating Margin (11.8%) 10.11% 12.79%

Looking at the chart above, you might think that with Sprint Nextel Corporation (NYSE:S) trading at just 0.55 times sales that it is cheap. However, compared to its larger peers, Sprint’s growth is not outstanding, and its operating margins remain horrendous.

Therefore, its discounted price/sales ratio is a result of its operating inefficiencies, as the market naturally awards higher premiums to those companies that operate with the most efficiency. At 0.55 times sales, Sprint Nextel Corporation (NYSE:S) is now fairly valued relative to fundamentals, not undervalued, and with the iPhone no longer producing robust sales growth, the company does not have a catalyst to create excitement.

Where to invest in telecom?

Naturally, my outlook in this space has changed over the years. From 2009 – 2011 AT&T was my largest holding, but in 2012 Sprint became my preferred choice. Now, after a 200% gain, I consider Sprint Nextel Corporation (NYSE:S) the worst investment of these three stocks.

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