JPMorgan Lifts Sprint (S) to Outperform; Sees Benefit from Industry M&A, Potential for EBITDA Upside
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Sprint (NYSE: S) shares are outpacing the market Friday following an earlier upgrade from Neutral to Overweight by J.P. Morgan.
Key points behind the upgrade:
Key points behind the upgrade:
- Increased confidence in Sprint's Network Vision plan as the initiative is on or close to schedule and working as anticipated.
According to JPMorgan, Sprint had 600 Network Vision sites up and running at the end of first-quarter 2012. Sprint sees launching LTE in six additional cities by mid-2012. Equipment upgrades at sites appear smooth with the move to CDMA at 800-MHz fixing to improve indoor/outdoor coverage.
- Consensus revenue-to-EBITDA estimates are looking reasonable (though still undervalued vs. JPMorgan ests). ARPU is still low.
JPMorgan is looking at revs of $35 billion for Sprint in 2012, with EBITDA of $3.94 billion. Both are largely in-line with consensus views calling for revs of $35.1 billion and $3.98 billion, respectively. Consolidated service revs are expected to grow 4.5 percent year-over-year, flat with Sprint's 4 percent to 6 percent expectations.
- EBITDA expectations likely to rise.
Despite expectations for more spending on Apple's iPhone and Network Vision in the second half of 2012, JPMorgan sees upside in EBITDA for the period, bolstered by a potential outlook boost by Sprint towards July.
- Pricing throughout the industry is stable or increasing, with little risk of a price war from T-Mobile.
Sprint boosted its data plan fee by $10 on smartphones in January, 2011, but kept things stable with the retention of unlimited usage. This in contrast to Verizon (NYSE: VZ) and AT&T (NYSE: T) which both appear to lean more to tiered data plans. The wildcard is T-Mobile, though JPMorgan sees the firm as ramping-up on marketing and sales efforts rather than trying to break new ground on subsidies.
Subsidy efforts around the segment appear to be at par, overall, without one carrier making any drastic moves.
- Risk of liquidity is on the back burner.
Sprint has about $7.6 billion of cash and a $1 billion vendor financing deal with Ericsson (Nasdaq: ERIC). This provides Sprint with enough cash to last years even if locked out of debt markets for an extended period. JPMorgan said it expects "additional vendor financing deals in 3Q, and Sprint also has ~$8 billion in guaranteed debt capacity that it could access to refinance maturities if needed."
- Sprint could benefit from M&A within the sector, even if its not directly involved.
With a modest glut of facilities-based carriers and an untold number of off-brand virtual operators in the market, Sprint could stand to benefit from an increased competitive stance should the industry consolidate more. There would be better spectrum utilization, more power in negotiating with suppliers, and easier differentiation, JPMorgan contends.
The firm also sees potential M&A for Sprint, but nothing material likely until 2013.
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