In contrast to a slew of negative notes on Sprint-Nextel (S) this week, Credit Suisse’s Jonathan Chaplin today reiterates an Outperform rating on the stock, writing that the impact of Apple’s (AAPL) iPhone on Sprint’s profit is not as bad as some believe.
The iPhone 4S went on sale today at Sprint stores nationwide, and there were lines at some outlets to buy it.
“It is time to buy Sprint again,” writes Chaplin, who argues that because investors didn’t have enough information about the cost of the iPhone to Sprint, they over-reacted about the funding gap Sprint will face for its network expansion.
Sprint a week ago�held an analyst meeting at which it said it would spend billions more to upgrade its network to “4G” capabilities. At the same time, the company frustrated investors by failing to disclose how much it would have to spend in subsidies to support Apple’s phone. The stock received six downgrades this past Monday in response, and its chairman told Bloomberg the company erred in not providing more information. FBR Capital’s David Dixon stepped in on Tuesday to say the funding gap wasn’t as bad as some might think. But criticism and worry persisted, and�today, Moody’s cut its rating on Sprint’s debt.
Chaplin’s calculation assumes Sprint adds 1.5 million iPhone subscribers this quarter on a “gross” basis, and 870,000 each quarter thereafter, to arrive at 9.92 million subscribers by the end of 2014, and 12.1 million by the end of 2015.
He bases those numbers on the report from The Wall Street Journal two weeks ago that said that Sprint had to commit to buying around 30.5 million devices over four years. Hence, by his metrics, a total iPhone subscriber base of 12.1 million by 2015 would assure Sprint the necessary purchases, based on both new subs and those who will buy additional iPhone units.
The cost is not as bad as some would believe, he writes:
Management suggested they need $3BN in additional funding to maintain an adequate liquidity cushion over the next two years, before the impact of the iPhone. 13.5MM iPhone sales over the next two years would increase the funding need by $0.9BN to $3.9BN.
By 2014, those 9.92 million cumulative iPhone subs will surpass the cost of the subsidy, Chaplin writes, and the company will be bringing in incremental Ebitda of $152 million. That will double the following year, to $350 million.
That $350 million would boost the value of Sprint’s stock by 46 cents per share, he believes. He currently values the core business at $1 per share. Add to that $3.50 per share in value for the “Network Vision” infrastructure, once it’s completed, and you’ll have a stock approaching $5, though Chaplin’s actual price target is just $4.50.
Still, “$4.50 is a long way from $2.78,” he concludes.
Sprint shares today are up 6 cents, or almost 2%, at $2.84.
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