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Sprint Nextel: All Depends On Network Project Execution

 April 26, 2012 03:28 PM

(By Mani) The fate of Sprint Nextel Corp. (NYSE:S) depends highly on its execution of Network Project. The plan would have Sprint consolidate multiple network technologies into one seamless network with the goal of increasing efficiency, enhancing network coverage, call quality and data speeds for customers across the United States.

Sprint's stock could prove attractive as it could rise to the mid-to-high single digits if the company is able to execute properly and expand margins in 2013/2014.

Sprint will be focusing on maximizing profitability as the iDEN network is a year away from being shut down. The company seems to be on track to rectifying its operational difficulties. However, the stock will likely remain volatile, and the company has a few tough quarters ahead.

[Related -Sprint Corporation (S): Sprinting To $10?]

"We believe S is doing a good job so far executing on Network Vision, and the company will have higher postpaid sub losses (which will help lower subsidy expenses) while maintaining pricing discipline," Oppenheimer analyst Timothy Horan wrote in a note to clients.

The key for Sprint revolves around its 2014 EBITDA growth as this could be the first clean year post-IDEN/Wimax migrations as Horan expects a significant 400 basis points EBITDA margin lift.

The analyst's bull case would see a $7 billion EBITDA in 2014, which could translate to a possible tripling of Sprint's stock price, while the base case would be $6 billion in EBITDA, which could imply about 65 percent stock appreciation.

[Related -Sprint Corporation (S): Flexing Spectrum Muscle Amid Network Evolution]

As per the bear case, given the company's high leverage, if the company failed to deliver on its Network project, the company could even file for a bankruptcy.

"Per the bear case, given the company's high leverage, if the company misexecutes on its Network project, then bankruptcy would not be out of the question (though we believe it would not be highly probable)," Horan noted.

In the first quarter, Sprint's net loss widened to $863 million or $0.29 per share from last year's $439 million or $0.15 per share. Net operating revenues rose 5 percent to $8.73 billion on 7 percent increase in wireless revenues, driven by increased smartphone penetration. Sprint sold more than 1.5 million of Apple's iPhones in the quarter, with 44 percent going to new customers.

For fiscal 2012, the company expects adjusted OIBDA to be at the high-end of the previous forecast of between $3.7 billion and $3.9 billion. It continues to anticipate full-year consolidated net service revenue growth of 4 to 6 percent.

As a result, Sprint would be an attractive investment opportunity for investors with a two- to three-year outlook and high risk tolerance.

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