After receiving "dozens of calls from investors," an analyst team at J.P. Morgan Securities led by Philip Cusick issued a note on Friday reiterating its Neutral rating on Sprint (S).
While the rating was Neutral, several of the points made in the note suggest reasons to be bearish. (Also worth noting, Sprint has been an investment banking client of J.P. Morgan within the last 12 months.)
"We remain wary on shares long term given the company's leverage and competitive challenge but near-term believe that cash burn fears in 2016 are overdone and we could see some relief with the company's earnings next week," Cusick wrote.
The troubled wireless services provider has come under increased scrutiny in recent weeks following a report from Re/Code, which stated that Sprint finalized its plans to overhaul its cellular network in order to save $1 billion. Among Sprint's cost-cutting measures are plans to reduce its network costs by leasing space for its radio equipment on government-owned properties instead of its existing placements with Crown Castle (CCI) and American Tower (AMT).
While Sprint's CFO Tarek Robbiati said during a conference in December that the company's priorities are "cost cuts, cost cuts and, again, cost cuts," its reported plans to switch tower providers was questioned by analysts as the company still has at least five years left on its existing contracts.
Furthermore, "there are no macro towers owned by the government that Sprint can magically switch to ¿ if there were then they would be leased up already and there is no reason that Sprint wouldn't have been on that public site to begin with," Cusick wrote.
But the real trouble with Sprint is its debt load and its falling revenue. In September, Moody's downgraded Sprint's company rating to B3 due to the company's "highly leveraged capital structure, intense competitive challenges, a deteriorating liquidity position."
The company has approximately $32 billion in debt, with $5 billion of it due to mature in 2016 and 2017. While the company rating is B3, several of the individual issues, including the ones due to mature in 2016 and 2017 are rated Caa1, which is one notch below the company rating.
"Bankruptcy/debt restructuring does not look likely near term, but seems highly likely if Sprint continues to lose revenue," Cusick wrote.
However, revenue could continue to fall for the company as it has relied on a "cut my bill in half" promotion to win customers away from Verizon (VZ), which responded with its own promotions to win customers back.
While Cusick cites the decline in Sprint's client churn, he characterizes its network as "not great, not terrible, but ok." Being an "ok" network is not enough as customers are increasingly using their mobile devices to stream video. Frequent stops while watching Netflix (NFLX) and YouTube, may make clients continue switching -- even if they pay a premium.
With falling revenue a possibilty, there is reason to look at the company's ability to meet short-term liabilities. It's ability to meet short-term liabilities with current assets has steadily fallen since the third quarter of 2014 and its current ratio is 0.76.
Given Sprint's debt load and reputation as a "poor carrier," as mentioned in the J.P. Morgan report, it is surprising that anyone could be "neutral" on it.