Sprint Outlook In An iPhone World

Sprint stock is cheap. It's really cheap. Does that make it a good investment though?

Well, Sprint just got the iPhone. That's huge, but they may have taken a huge gamble in getting it. They overpaid for the iPhone and made the mistake of telling everyone that they made that mistake:

“Friday was tough on the stock, tough on everybody in terms of the way it came across,” Hance said in an interview. “It was a mistake not to disclose the impact of the iPhone -- a mistake we will fix. We will talk about the impact when we talk about the third-quarter earnings."

As a company that has already shown that it has had problems becoming profitable, Sprint took a huge leap to get the iPhone on its network. The cache of having the iPhone on its network might have clouded the judgment of the executive who made this deal. What's worse is that they could not explain the purpose of the deal well to analysts:

Last week the laughter came from analysts at Sprint's investor meeting, where Mr. Hesse and executives laid out an inscrutable and incomplete financial plan that Wall Street's brightest admitted they could not make heads or tails of. Then Sprint dropped the bomb. It may need to go to the capital markets to fund a wireless business that, by now, ought to be spinning off loads of cash. The stock promptly plummeted 26% in an afternoon.

That just screams poor leadership. As an investor, you look at the management of the company and you have to be weary. They've made several poor decisions that has resulted in the continued evaporation of shareholder equity. You shouldn't catch a falling knife.

But is there upside to Sprint? While AT&T and Verizon both have delays on the new iPhone, Sprint has it available:

But Sprint, while it’s sold out of the 16GB model, still has the more expensive versions in stock, and its website says they’ll be delivered on Oct. 14 or 15.

While it suggests that the movement to Sprint for the iPhone has been slower than anticipated, it also means that people will have to go to Sprint if they want the iPhone. Remember, a lot of customers are under contract and don't want to go through the hassle of changing service. Furthermore, Sprint has the benefit of having better service:

The No. 3 U.S. wireless carrier does have its fans – a Consumer Reports survey last year ranked it even with Verizon in terms of overall customer satisfaction. It could be that AT&T and Verizon found more buyers for the expensive versions amid their corporate customer base. Or maybe Sprint’s just off to a slow start.

Sprint, unlike its competitors, offers unlimited data, which might be a huge draw for people who are sick of paying overages. I really think Sprint really needs time with the iPhone. No one should have expected it to have an immediate impact. I think people looked for phones more than service. Now that the playing field is leveling out, we should see a hunt for the best service. Sprint should be able to capitalize on this market shift.

Furthermore, Sprint has announced its plan to implement its 4G LTE network:

At its Oct. 7 meeting, Sprint had indicated its plans to take on additional debt to fund the rollout of their new higher-speed 4G LTE network by mid-2012. It had also earlier announced unlimited data plans for iPhone users.

We believe that if the company is able to lure iPhone users with its uncapped data plans and at the same time increase speeds and reduce costs by using its LTE network, the long-term prospects of the company looks good. However liquidity concerns arising from excessive debt on its balance sheet will continue to be a major deterrent to its business, and should this strategy not pay off, Sprint could be in dire straits.

Liquidity is at a premium in the market, given the ongoing concerns with debt throughout the world. However, Sprint should have some momentum with the iPhone buzz. While analysts are portraying the company negatively at the moment, there is a lot of reason to believe that Sprint will recover. Its services will only get better with the implementation of LTE and it should be able to distance itself from Verizon in that regard. It offers a better package than Verizon and AT&T, and as the consumers begin to realize that, this iPhone gamble will start to pay off for Sprint.

While Sprint may struggle in the short term, there is still plenty of upside as the company navigate to a 4g LTE world.