Sprint (S) shareholders should not get their hopes up as the telecom giant's earnings loom, analysts at Pacific Crest said in a Wednesday note.
Earnings expectations for Sprint are generally based too much on the perceived benefits that the nation's fourth-largest telecom giant will achieve through sale-leasebacks of its equipment, the analysts said. (Sprint is slated to report its fiscal-year 2015 earnings on May 5.)
Pacific Crest also expressed doubts in remarks from Sprint's CFO Tarek Robbiati that "we will see a blip in churn this quarter," the analysts said in a report that downgraded Sprint to Underperform from Market Weight. The analysts also based their rating on the liklihood that subscriber momentum is decreasing.
Sprint is a member of Real Money's "Stressed Out" watch list largely because of a persistent cash burn and entanglement in about $34 billion in high-yield debt, which is an asset class deemed sub-investment-grade and particularly taxing on the network because of steep interest payments.
"Don't take Sprint's guidance at face value," the analysts said. "Investors should be aware of the changes going on underneath the surface at Sprint."
Pacific Crest pointed to Sprint's most recent debt relief efforts, which include the $2.2 billion lease-back effort that Sprint announced last week to help the network meet a $2.3 billion debt maturity this November.
The lease-back will involve equipment related to cell towers that have a $3 billion book value. The deal will involve the creation of an investment company led by Sprint's parent company Softbank, and primarily will serve as a means for Sprint to shore up liquidity and pay down debt, the analysts said.
"In essence, the network lease company is an asset sale to raise cash to pay off debt," they said. "Other companies deploying a similar financing mechanism would be viewed negatively by the market."
Sprint booked about $2.2 billion of cash at the end of 2015, based on its last reported filing with the SEC, which is a 40% decrease year over year. Meanwhile, Sprint's debt has increased by more than $1 billion over the period.
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