"Despite a host of near-term issues, Sprint (NYSE: S) has many of the attributes we look for in a turnaround stock: a solid core business, well-known brands, new management, manageable cash flow and even an activist shareholder to stir things up," notes George Putnam, III.
In his industry-leading The Turnaround Letter, the advisor looks expert at the firm, which he notes traces it roots back to the Brown Telephone Company in Kansas in 1899.
"When the long-distance market was opened to competition in the early 1980's, Sprint moved in aggressively. In early 2005, Sprint acquired Nextel, which had become a major wireless competitor with its innovative 'push to talk' technology that combines elements of the walkie talkie and the cell phone.
"The $35 billion transaction was supposed to vault Sprint into the leadership of the wireless market. Unfortunately, the combined company stumbled. Difficulty in integrating the two companies led to poor customer service which drove some consumers away.
"Investors, who had initially applauded the Nextel acquisition, pushing the stock above $27 in mid-2005, became concerned, and the stock has been in a steady decline for the past two-and-a-half years. And the company's poor earnings report on February 28 further discouraged Wall Street.
"While Sprint's business has weakened somewhat over the past year, there is still plenty there for management to work with. They have revenues of $40 billion, and a wireless customer base of nearly 54 million subscribers.
"Both Sprint and the pre-merger Nextel have advertised heavily in recent years, and so their brands remain strong. New CEO Dan Hesse took the helm in December. He has 30 years of experience in the telecommunications industry, including 23 years at AT&T.
"Hesse is already taking steps to streamline operations, improve customer service and develop innovative marketing programs. On the operations front, Hesse is cutting headcount, consolidating top management in Sprint's Kansas City headquarters and instilling a companywide focus on customer service.
"On the marketing front, Hesse has just announced a one-price 'Simply Everything' program that gives wireless customers unlimited voice and data access for $99, well below competitors' pricing.
"Sprint is working hard to stay at the forefront of telecommunications technology. In addition to upgrading Sprint's CDMA and Nextel's iDEN networks, the company is investing heavily in WiMax, which many experts
consider to be the technology of the future.
"While Sprint's balance sheet is burdened with a fair amount of debt, it appears manageable. The company is still generating decent cash flow, and it recently eliminated its dividend and stock buyback program to give it more flexibility to invest in the business.
"Stockholders can take some comfort in the fact that noted activist investor Ralph Whitworth joined the board of directors this past month. If results do not begin to improve soon, Whitworth is likely to push for the sale of the company, or at least some of its parts.
"As the telecommunications industry continues to consolidate, Sprint (or some of its pieces) would be a desirable target. And the price could be quite attractive. With a market capitalization of $23 billion, Sprint is trading about 35% below what it paid for Nextel only about three years ago. Whether the company turns its operations around or gets sold, either way the stock looks cheap to us."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
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