Several firms are commenting on Sprint Nextel (NYSE:S) after the co pre-released weak Q4 numbers and also guided down for 2007:
- Merrill Lynch notes that the mid-point of Sprint's EBITDA outlook for 2007 is about 12% below their previous estimate and 15% below consensus. Therefore, we now have the second major estimates downgrade since last August. Firm's estimates for 2007 had already been below consensus. They are lowering their consolidated EBITDA estimates for Sprint from $12.8bn to $11.8bn for 2007 and from $13.2bn to $12.5bn for 2008. EPS estimates fall from $1.25 to $1.00 in 2007 and from $1.32 to $1.17 in 2008.
Sprint shares traded in the after market at approximately $18 per share. On ML's revised estimates, Sprint trades at an EBITDA multiple of approximately 6.1x for 2007E and 5.3x for 2008E, which is in line with AT&T and Verizon trading at 5.6x and 4.9x EBITDA for 2008E, respectively. A positive for the stock is that after the second major estimates downgrade, Sprint presumably believes that it can exceed its updated outlook for 2007. However, valuation at levels in the after market is still only in line with the telecom comparisons even for 2008.
Firm's estimate revisions better reflect their view that Sprint does not have a quick fix for its problems, and that it must reinvest in the business, particularly on the Nextel side. Maintains Neutral
- Stifel notes the company reported losing 306,000 post-pay subscribers in 4Q06, versus their estimate of a loss of 200,000 post-pay subs, but did show some strength in wholesale subscriber adds, adding 876,000 in the quarter. Management continued to indicate much of the weakness stemming from the iDEN (legacy- Nextel) subscriber base, with churn increasing dramatically in the former- Nextel Partners properties.
The company clearly continues to struggle with integrating the legacy-iDEN networks, with the lower-margin revenue mix generated by the struggling iDEN business continuing to hamper consolidated results. Given the weak 4Q06 results and soft 2007 guidance, this may legitimately be the last surprisingly bad news from the company for a while, the firm still does not view the stock as compellingly inexpensive at current levels.
They believe the company has given itself a fairly low bar to cross in 2007 from a financial standpoint, although they would certainly like to see some stability from the company's post-pay retail operations before they become more confident in our financial estimates. From a momentum perspective, they wouldn't be surprised to see a near-term bottom occur sometime this week as
the market digests the new guidance and investors begin to perceive this as the last spate of bad news in the near term. Maintains Hold.
- Deutsche Bank is downgrading their rating to Sell from Hold saying that with the significant cut in estimated 2007 EBITDA, and with higher expected capital expenditures, it would seem that Sprint's operating performance will continue to deteriorate throughout 2007 before we are to witness signs of improvement. They now look for negative net subscriber additions in all four quarters for 2007.
With the pre-announcement, the company reported that it would significantly increase its 2007 forecasted capital expenditures to $8.5 billion, well above DB's estimate of $7.7 billion for 2007. The increase in capital expenditure forecast combined with the reduction in EBITDA estimates reduces firm's 2007 estimated free cash flow by more than 60% to $1.429 billion.
Following two quarterly disappointments in the past three that resulted in a meaningful reduction in forward estimates, with the continued deterioration of the company's basic post paid subscriber base, and with dwindling free cash flow to support the company's $6.0 billion share repurchase program (of which the company has repurchase $1.6 billion to date), they believe the long speculated concept of a leveraged buy-out will quickly fade from reality.
Although they believe that Sprint Nextel suffers from severe operational issues and is exposed to a fair degree of technology risk related not only to its network integration but also its iDEN re-banding effort, they also believe that it is a company capable of stabilizing core operations, as it has before. If this is the act of a management and board intent upon providing investors with a worst case perspective of a 2007 outlook, there is potential upside to firm's $11.3 billion EBITDA estimate.
DB finds it difficult to see why investors would pay much more than 5.0x for a company that has yet to produce even the slightest signs of stabilizing operations at a time when so many were assuming operational improvements to be a foregone conclusion. Accordingly, in taking the mid-point of the new guidance range and the mid point of the 5.0x - 5.5x EV/EBITDA multiple range in which the stock traded at before and after the significant share repurchase program was announced, the firm arrives at their revised $14 target price.
- JP Morgan thinks the patient will walk again as the company stated on the call that net adds should reverse to positive by 2Q07, a bold statement considering that suggests a turnaround within the next 90 days. Second, 2007 guidance was "the shoe drop" investors waited for, and we could see long-only buying today. Third, comments made today support firm's view that 3Q06 marked the operational bottom (variance of management targets vs results).
To achieve positive net adds in 2Q, gross adds need to be +/- 4% from the 4Q06 run-rate of 2.6mm and churn needs to improve 14-31bp (to 2.03%-2.11%) from 4Q. The improvements in churn seem achievable given positive seasonals as well as the waning iDEN churn impact (which is the source of negative growth).
Reducing 07 estimates, but S still trades at a 29% discount to Alltel. JPM would be buyers, especially on weakness.
Notablecalls: Must say I have very little feel for this one. Comments from both sides of the fence make sense. On one hand we've seen these potential LBO candidates bounce back hard following negative pre-releases but on the other hand comments from DB make me want to put out a small short above the $18 level. Sitting at my old trading desk I would most likely put out some light bids around $17.50 to catch the other side of some panicky downgrades. Nothing big, though. Would risk half a point or so.
- Merrill Lynch notes that the mid-point of Sprint's EBITDA outlook for 2007 is about 12% below their previous estimate and 15% below consensus. Therefore, we now have the second major estimates downgrade since last August. Firm's estimates for 2007 had already been below consensus. They are lowering their consolidated EBITDA estimates for Sprint from $12.8bn to $11.8bn for 2007 and from $13.2bn to $12.5bn for 2008. EPS estimates fall from $1.25 to $1.00 in 2007 and from $1.32 to $1.17 in 2008.
Sprint shares traded in the after market at approximately $18 per share. On ML's revised estimates, Sprint trades at an EBITDA multiple of approximately 6.1x for 2007E and 5.3x for 2008E, which is in line with AT&T and Verizon trading at 5.6x and 4.9x EBITDA for 2008E, respectively. A positive for the stock is that after the second major estimates downgrade, Sprint presumably believes that it can exceed its updated outlook for 2007. However, valuation at levels in the after market is still only in line with the telecom comparisons even for 2008.
Firm's estimate revisions better reflect their view that Sprint does not have a quick fix for its problems, and that it must reinvest in the business, particularly on the Nextel side. Maintains Neutral
- Stifel notes the company reported losing 306,000 post-pay subscribers in 4Q06, versus their estimate of a loss of 200,000 post-pay subs, but did show some strength in wholesale subscriber adds, adding 876,000 in the quarter. Management continued to indicate much of the weakness stemming from the iDEN (legacy- Nextel) subscriber base, with churn increasing dramatically in the former- Nextel Partners properties.
The company clearly continues to struggle with integrating the legacy-iDEN networks, with the lower-margin revenue mix generated by the struggling iDEN business continuing to hamper consolidated results. Given the weak 4Q06 results and soft 2007 guidance, this may legitimately be the last surprisingly bad news from the company for a while, the firm still does not view the stock as compellingly inexpensive at current levels.
They believe the company has given itself a fairly low bar to cross in 2007 from a financial standpoint, although they would certainly like to see some stability from the company's post-pay retail operations before they become more confident in our financial estimates. From a momentum perspective, they wouldn't be surprised to see a near-term bottom occur sometime this week as
the market digests the new guidance and investors begin to perceive this as the last spate of bad news in the near term. Maintains Hold.
- Deutsche Bank is downgrading their rating to Sell from Hold saying that with the significant cut in estimated 2007 EBITDA, and with higher expected capital expenditures, it would seem that Sprint's operating performance will continue to deteriorate throughout 2007 before we are to witness signs of improvement. They now look for negative net subscriber additions in all four quarters for 2007.
With the pre-announcement, the company reported that it would significantly increase its 2007 forecasted capital expenditures to $8.5 billion, well above DB's estimate of $7.7 billion for 2007. The increase in capital expenditure forecast combined with the reduction in EBITDA estimates reduces firm's 2007 estimated free cash flow by more than 60% to $1.429 billion.
Following two quarterly disappointments in the past three that resulted in a meaningful reduction in forward estimates, with the continued deterioration of the company's basic post paid subscriber base, and with dwindling free cash flow to support the company's $6.0 billion share repurchase program (of which the company has repurchase $1.6 billion to date), they believe the long speculated concept of a leveraged buy-out will quickly fade from reality.
Although they believe that Sprint Nextel suffers from severe operational issues and is exposed to a fair degree of technology risk related not only to its network integration but also its iDEN re-banding effort, they also believe that it is a company capable of stabilizing core operations, as it has before. If this is the act of a management and board intent upon providing investors with a worst case perspective of a 2007 outlook, there is potential upside to firm's $11.3 billion EBITDA estimate.
DB finds it difficult to see why investors would pay much more than 5.0x for a company that has yet to produce even the slightest signs of stabilizing operations at a time when so many were assuming operational improvements to be a foregone conclusion. Accordingly, in taking the mid-point of the new guidance range and the mid point of the 5.0x - 5.5x EV/EBITDA multiple range in which the stock traded at before and after the significant share repurchase program was announced, the firm arrives at their revised $14 target price.
- JP Morgan thinks the patient will walk again as the company stated on the call that net adds should reverse to positive by 2Q07, a bold statement considering that suggests a turnaround within the next 90 days. Second, 2007 guidance was "the shoe drop" investors waited for, and we could see long-only buying today. Third, comments made today support firm's view that 3Q06 marked the operational bottom (variance of management targets vs results).
To achieve positive net adds in 2Q, gross adds need to be +/- 4% from the 4Q06 run-rate of 2.6mm and churn needs to improve 14-31bp (to 2.03%-2.11%) from 4Q. The improvements in churn seem achievable given positive seasonals as well as the waning iDEN churn impact (which is the source of negative growth).
Reducing 07 estimates, but S still trades at a 29% discount to Alltel. JPM would be buyers, especially on weakness.
Notablecalls: Must say I have very little feel for this one. Comments from both sides of the fence make sense. On one hand we've seen these potential LBO candidates bounce back hard following negative pre-releases but on the other hand comments from DB make me want to put out a small short above the $18 level. Sitting at my old trading desk I would most likely put out some light bids around $17.50 to catch the other side of some panicky downgrades. Nothing big, though. Would risk half a point or so.
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