Why Sprint PCS Could Pick Up Speed


By Olga Kharif These are rough times for cell-phone stocks. Across the industry in 2002, wireless shares have dipped to new lows, as overcapacity and a slowdown in growth have become glaringly apparent in the economic downturn. But sometimes rough times result in stock bargains -- which is why smart investors might want to reconsider Sprint PCS (PCS).

The stock has been hammered harder than most in its industry. While the Philadelphia Wireless Telecom Index has fallen 30% since January, Sprint PCS's shares have dropped some 60% -- from about $27 to around $12 on Mar. 12. The whole sector has been downgraded by a number of investment banks since mid-February due to increased pricing pressure in the industry and bad news from third-largest wireless operator AT&T Wireless (AWE), which recently reduced its revenue growth outlook for 2002. But what has hurt Sprint PCS the most are concerns over its debt load -- $16 billion, as of January 31, 2001.

Sprint PCS seems to be making all the right moves, though. Since early 1999, it has attracted new customers at the fastest rate in the industry, and it expects to increase that base by an additional 3 million in 2002. (With 15.8 million customers, it still ranks fourth, after Verizon Wireless (VZ), Cingular Wireless, and AT&T Wireless). Moreover, it successfully floated a $5 billion bond on Mar. 8 that should buoy it through 2002, after reaffirming its financial targets for the year two days earlier.

DEBT DOWNGRADE. That's why the majority of analysts rates the stock a long-term buy, while most of the sector has a big sell sign overhead. On Mar. 12, Morgan Stanley upgraded Sprint PCS from neutral to outperform, and Deutsche Banc Alex. Brown raised its rating from market perform to buy.

Liquidity has been the Street's biggest concern, especially after Enron's unraveling and service provider Global Crossing's journey into Chapter 11. Sprint PCS is a tracking stock, with debts and assets reflected on the balance sheet of parent company Sprint (FON). Credit-rating agency Moody's downgraded Sprint's huge debt a notch on Mar. 6 (including that from the wireless division, the company carries a total load of $22 billion). But the stocks are still investment grade, and the downgrade had little impact on their value because the move was already widely expected, say analysts.

And Sprint PCS appears to be dealing well with its short-term debt problems. On Mar. 1, it secured a $1 billion bank line of credit at a reasonable rate, say analysts. It also hopes to raise $500 million by refinancing its accounts receivables. And the bond it floated on Mar. 8 raised $5 billion -- more than double the $2 billion analysts had expected. The offering was the second-largest U.S. corporate bond sale this year, after timber company Weyerhaeuser, which raised $5.5 billion on Mar. 6. All told, the funds should replace $1.7 billion in debt due to mature this year. Sprint PCS declined to comment for this story.

INTO THE BLACK? The upshot: Sprint probably won't need to borrow any more money for the foreseeable future. And Richard Prentiss, an analyst with investment bank Raymond James & Associates, thinks Sprint's wireless business could actually turn cash-flow positive in 2003, thanks to the continued strong growth of its customer base. After all operating expenses and capital improvement charges are paid, Sprint PCS should finish 2002 with $1 billion in extra cash. That means the company could turn profitable earlier than many of its rivals, including Cingular. In the past quarter, all major wireless operators lost money.

And if times turn rougher? Parent Sprint has a lot of assets that it should be able to sell quickly -- even in this difficult economic environment, estimates Alex Trofimoff, an analyst with Sanford Bernstein. He figures Sprint owns some $3.5 billion worth of directory and supply businesses, and it still has a stake in Internet service provider EarthLink, which it may be willing to part with if it means keeping its wireless division going.

Sprint PCS has other positives: It has been growing faster than the rest of the pack since 1999, and its costs are among the lowest. It has plenty of unused wireless spectrum, needed to transmit voice calls and data. And this summer, Sprint PCS is expected to roll out its new, nationwide wireless network at least six months ahead of rivals. That might give it a leg up in attracting business customers interested in Web-surfing capacity and e-mail access through handheld devices.

PRICE WARS. Not everyone is so sanguine about Sprint PCS's prospects. The company "is fantastically positioned in an industry that's going the wrong way," is how Bill Benton, an analyst with William Blair & Co., puts it. Price competition has grown intense, as the six major wireless providers struggle to survive in an crowded field.

In early February, VoiceStream, one of the smallest national wireless operators in terms of subscribers, started to sell 3,500 anytime, anywhere voice minutes for $60 a month. That should be almost below cost, as long-distance calls and roaming, included in the package, are expensive, says Timothy O'Neil, an analyst with SoundView Technology. Then, on Mar. 4, Cingular Wireless eliminated roaming and long-distance charges, taking on AT&T Wireless, which prospered on a similar offering. As a result, the industry's average revenues per customer could plunge 10%, says Benton.

Still, Sprint PCS may be best able to endure a price war. For starters, it already offers some of the lowest rates around. Cingular's new plan, at about 7.5 cents a minute, simply matches Sprint PCS's comparable levels, say analysts. And once its new network is deployed, margins could grow from 17% this year to about 25% in 2003, as costs plummet further, estimates Rick Black, an analyst with Blaylock & Partners. The new network should be able to handle more customers, so the costs of adding a new subscriber should be lower. And Sprint PCS could generate additional revenues by offering data services.

SPECTRUM WANTED. Here's the real wild card: Sprint PCS could be a tempting takeover target if consolidation sweeps the industry. With the release of new wireless spectrum tied up in a case now headed to the Supreme Court, big operators such as Verizon and Cingular are looking for unused spectrum space -- and Sprint PCS has plenty of it. If a larger carrier makes a bid for Sprint PCS, its $12 shares could fetch more than $35 each, Trofimoff believes.

Of course, being fourth in a field of six, in an industry where many analysts believe only one or two major wireless providers will survive, is hardly an ideal position. And the sector still faces daunting challenges at least through yearend. Still, Sprint PCS could surprise investors who make the risky call now. Kharif covers telecom for BusinessWeek Online from Portland, Ore.


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