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My Favorite Tech Trade Today

By Frank Curzio, editor, Phase 1 Investor
Friday, November 12, 2010

On October 26, Sprint did it again. The mobile phone operator disappointed investors... again.
 
Earnings for its third quarter fell short of analyst estimates. That's a big deal when over 75% of the S&P 500 companies that already reported earnings beat the estimates for the current quarter.
 
The stock saw a quick 10% selloff. It's now trading just above $4 a share.
 
Sprint investors are used to disappointment. In 2008, the company wrote off $31 billion on its botched Nextel acquisition. That's almost three times the size of the company's current market cap. Analysts consider that acquisition one of the worst in history.
 
And from 2007 through early 2009, Sprint lost millions of subscribers to AT&T and Verizon. Customer service ranked near the bottom of every poll taken. In that timeframe, the stock fell from $22 a share to under $2.
 
Despite the negatives, the stock is a strong buy at these levels.
 
You see, over the past six months, Sprint bears have done everything in their power to push shares below $4. But as you can see from the chart, the support line holds every time.
 
In fact, every time Sprint has tested the $4 level, the stock jumps at least 20% in 30 days. Take a look...
 
 
But that's not the only reason I like Sprint.
 
Looking at the quarter, Sprint only missed earnings by two cents. Revenues actually came in ahead of estimates. The company added 644,000 subscribers. That's a far cry from the millions lost over the past three years. Also, the amount of subscribers discontinuing service fell to less than 2%. That's the lowest level for prepaid subscribers in five years.
 
Analysts believe competition will hurt Sprint in 2011. Verizon and AT&T are making a push into 4G – which provides faster download speeds. T-Mobile is also increasing R&D to rebrand its image. This could hurt Sprint's profits down the road.
 
But let's take a look at the chart below...
 
 
Market Cap
Cap-Ex 2010*
Subscribers Added 2010*
Total Subscribers
AT&T
$172B
$17B
9.2M
92M
Verizon
$93B
$17B
5.3M
83M
Sprint
$12B
$2B
1.1M
48M
 
 
 
 
223M
* Expected
 
The total amount of U.S subscribers for these three companies is 223 million. Add in the 33 million T-Mobile subscribers and the total U.S count goes to 256 million. According to the U.S. Census Bureau, 233 million people over the age of 18 are living in the U.S.
 
In other words, every person over the age of 18 in the U.S. already owns a mobile phone. There's little growth left in the U.S. wireless market. That makes Sprint's 48 million subscribers a huge asset, one that's being drastically undervalued by analysts.
 
Looking at capital expenditures (cap-ex), AT&T and Verizon each spent about $17 billion in 2010 to build their subscriber base. For all that cash, AT&T added 9.2 million subscribers. Verizon added 5.3 million. These companies could add 48 million subscribers by using less cash to buy Sprint.
 
Sure, integration would be tough. But the acquirer would become the clear leader in U.S. wireless. Also, the cost savings over the first few years would probably range in the hundreds of millions.
 
On a technical level, Sprint's shares could pop 20% if the future is any indication of past price movements. Fundamentally, Sprint is a takeover target.
 
I believe the company would fetch more its book value ($5.25 a share) or more. That's more than 30% higher than the current price.
 
Good investing,
 
Frank Curzio




Further Reading:

Brian Hunt sees big opportunities in big tech. Two of his picks, "bellwethers of the sector, are cheap and in the process of bottoming." Find out what those two companies are, and why September 2010 was the big tech bottom here: These Incredible Companies Are Incredible "Buys".
 
Big-name tech stocks haven't been this cheap since the 1980s, "based on their forward price-to-earnings (P/E) ratios," Steve Sjuggerud recently wrote. "But when you subtract out their cash, these companies get 'stupid cheap.'" Read more here: All This "Dead Cash" Is Disguising Crazy Cheap Stocks.

In The Daily Crux
Market Notes
Big oil trend continues… PetroChina and Chevron surge to 52-week highs.
 
U.S. Dollar fund UUP jumps to highest level in two weeks.
 
National Bank of Greece falls to fresh low.
 
China coal play Puda Coal (PUDA) rockets more than 100% in less than two months.
 
Earnings today… Petrobras (Brazil oil giant), J.C. Penney, D.R. Horton (homebuilder), Wendy's.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1199.21 -1.2% +10.3%
Oil 36.47 -3.6% -7.1%
Gold 133.69 -2.9% +23.6%
Silver 25.52 -5.9% +50.8%
US-Dollar 78.15 +0.7% +3.3%
Euro 1.37 +0.2% -7.8%
Volatility 20.61 +10.6% -15.0%
Gold Stocks 551.84 -2.8% +22.8%
10-Year Yield 2.76 +4.2% -20.0%

World ETFs
Symbol Price
Change
52-Wk
USA 120.20 -1.2% +10.2%
Canada 29.39 -1.9% +14.9%
Russia 20.34 -2.4% +5.8%
India 38.61 -2.9% +28.6%
Israel 16.06 -2.1% +12.2%
Japan 10.25 -0.8% +8.0%
Singapore 13.96 -2.7% +24.8%
Taiwan 13.99 -2.4% +12.9%
S. Korea 55.46 -3.2% +24.2%
S. Africa 70.51 -1.7% +28.2%
China 46.02 -3.0% +3.1%
Lat.America 52.21 -1.8% +12.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 127.00 -2.2% +4.6%
Big Pharma 64.21 -1.0% +2.7%
Internet 70.43 -2.0% +22.8%
Semis 14.85 -0.5% +25.7%
Utilities 31.34 -0.8% +7.7%
Defense 17.73 -1.5% +8.4%
Nanotech 9.81 -0.2% +0.7%
Alt. Energy 10.05 -2.4% +2.5%
Water 17.77 -1.8% +10.0%
Insurance 15.97 -1.1% +16.9%
Biotech 20.08 -0.9% +24.0%
Retail 18.51 -1.2% +22.5%
Software 24.06 -1.2% +22.1%
Big Tech 52.51 -1.6% +20.3%
Construction 12.48 -2.0% +7.3%
Media 13.19 -1.0% +22.5%
Consumer Svcs 65.18 -1.0% +21.5%
Financials 54.21 -1.6% +4.2%
Health Care 64.01 -1.1% +5.5%
Industrials 60.37 -1.2% +16.5%
Basic Mat 70.74 -2.5% +22.6%
Real Estate 54.96 -0.9% +29.0%
Transportation 86.93 -1.1% +23.2%
Telecom 22.24 -1.2% +23.9%

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