Stressed Out: Sprint Could Be Hobbled by Cost-Cutting Imperative, Analysts Say

 | Mar 22, 2016 | 4:20 PM EDT
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

Sprint's (S) primary concern lately is cutting costs in hopes of shoring up enough cash to get out from under $34 billion in high-yield debt. But the network carrier could be missing out on big opportunities coming to market, some analysts say.

"Sprint seems to be focused on free cash flow generation due to its weak balance sheet and network, which limits its ability to continue to compete on price," Oppenheimer analysts said in a Tuesday report. (Sprint is a member of Real Money's "Stressed Out" watch list,)

Such a limitation may prove to be a serious impediment as rivals AT&T (T), Verizon (VZ) and T-Mobile (TMUS) all have submitted applications to take a piece of the Federal Communication Commission's massive auction for airwave frequencies, beginning next week and set to rake in up to $40 billion in sales.

It's still unclear whether Sprint's parent company SoftBank (SFTBY) has applied for the auction, although it is likely it will do so through a designated partner, the analysts said, noting Dish Network (DISH) is also absent from the current list of prospective bidders.

"In addition, Sprint's cut-your-bill-in-half promotion seems to be having less effect in the market, as customers who wanted a cheap price plan have already moved to Sprint or to one of the aggressive prepaid plans," Oppenheimer analysts said. "In this regard, we are modeling in flat revenues for Sprint going forward, but with very aggressive expense reductions, which in turn make it harder to be aggressive on gaining subscriber flow share."

The picture is particularly ugly for Sprint given its debt is hardly of the sort you would see on an investment-grade balance sheet, and instead vastly comprises high-yield debt -- that with a steep interest rate offered to counterbalance a credit rating Moody's and Standard & Poor's deem below investment grade.

For example, its roughly $1 billion tranche of unsecured notes maturing in 2021 are rated seven notches below investment grade by Moody's, and six below by S&P, and pay out a whopping 11.5% annual interest rate. 

It's this type of risky debt that's responsible for the more than $2.1 billion interest expense squeezing Sprint's free cash flow. 

And the fact that dark clouds overhang the general market for telecom carriers is not helping Sprint's picture, according to analysts at J.P. Morgan.

"Today we update estimates for AT&T, Verizon, T-Mobile US, and Sprint following public comments from recent conferences as the general theme suggests that customer activity has slowed post the holiday season and ahead of the upcoming iPhone 5se (end of March) and iPhone 7 (September) launches later this year," the analysts said. "We lower our upgrade estimates across the board and raise postpaid net adds at AT&T and T-Mobile while lowering at Sprint."

The analysts also said that cost-cutting restrictions at Sprint are hindering growth, largely driving their Tuesday decision to negatively revise revenue and growth projections for Sprint.

"We lower our 1Q postpaid net add estimate for Sprint to $200,000 from $350,000 (phone net adds fall to zero from more than $50,000) as the company is clearly more focused on cost cutting than sub growth this year as it strives for free cash flow stability," they said. "We also lower our upgrade rate estimate to 6% from 7.5% due to the generally lower industry customer activity."

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Sprint's Owner Plans to Buy Network out of High-Yield Debt Mess

Stressed Out: Sprint Is Collapsing Under the Weight of Its High-Yield Debt

Stressed Out: 3-D Printing and Semiconductors Are Getting Slammed

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