Sprint Nextel Corp. shares have outperformed Apple Inc. this year, along with all but one other stock in the Standard & Poor’s 500 Index. Can this be real?
“I tell the team here, ‘You’re not going to see any mission accomplished signs anywhere on this campus,’ ” Chief Executive Officer Dan Hesse said in an interview from his office in Overland Park, Kan. “This is a long process.”
In his five years running Sprint, Hesse has worked to fix the mess he was handed after the $36 billion purchase of Nextel failed and 7.7 million monthly subscribers fled the carrier. Though he has had his own struggles, such as a turbulent joint venture with Clearwire Corp. and a foray into dead-end WiMax technology, he predicts that Sprint is on track to return to profit growth in 2014, following seven years of losses.
Some analysts agree — with reservations.
“One thing that keeps people skeptical is that we’ve seen these head fakes before,” said Phil Cusick, an analyst with JPMorgan Chase & Co. in New York. “There’s no one on Wall Street who has been around for a while that hasn’t lost money on Sprint.”
Sprint’s challenges remain daunting. It’s a distant third to Verizon Wireless and AT&T Inc. in customers, and the bigger rivals have more extensive LTE networks, letting them offer speedier service to customers across the nation. Even if Sprint turns the corner in 2014, it will have suffered almost $50 billion in losses over a seven-year stretch, including estimated losses for 2012 and 2013.
Despite all that, Cusick has a buy rating on the stock. With Sprint shares up more than 140 percent this year, Wall Street has shown increasing faith in the comeback. A year ago, investors were concerned the company would crack under the pressure of a $7 billion network-upgrade plan and a costly bargain to get the iPhone — a deal that requires Sprint to buy $15.5 billion worth of devices from Apple Inc.
Since then, Sprint has gotten bigger benefits than expected from the iPhone, both by helping it attract customers away from other carriers and by boosting the size of users’ phone bills. Sprint also delivered on its promise to introduce a speedy LTE network in at least six cities during the summer. LTE, short for long-term evolution, is being added to 100 more towns and cities.
“A year ago, management was talking about all the things they needed to do — it was hard to listen to them, they had so little credibility,” said Scott Dinsdale at Montpelier, Vt.-based KDP Investment Advisors Inc., which owns Sprint bonds. “You just held your nose and held the bonds. Now they’ve gotten to the point where you can see light at the end of the tunnel.”
Sprint shares in the S&P 500 this year are second only to PulteGroup Inc., the Bloomfield Hills, Mich.-based homebuilder.
Sprint gained renown as an upstart long-distance competitor in the 1980s, when it touted a fiber-optic network with pin-drop clarity. After shifting its focus to the wireless market, the company pursued the Nextel Communications Inc. acquisition in 2005. Gary Forsee, then CEO, saw the deal as a way to compete with the industry’s big two — AT&T and Verizon. Instead, network glitches and customer service complaints put Sprint further behind.
Nextel’s network had 16.1 million customers when it was acquired. That number had plunged to 4.4 million as of June. In 2007, less than three years after the Nextel deal, Forsee was forced out.
Hesse, 58, said he’s orchestrating Sprint’s turnaround in three stages. The past four years have been a recovery period. This year and next, he said, are the investment phase. That’s when Sprint dismantles the outdated Nextel network and installs LTE technology.
Stage three will be Sprint’s growth phase, when these improvements begin to flow to the company’s bottom line. Sprint will see profit-margin expansion and earnings growth in 2014, Hesse said.
Sprint’s shares have beat the S&P 500 by about 125 percent this year. Before 2012, the stock had underperformed the index by 86 percent since the beginning of 2007.
When Hesse took over in December 2007, Sprint had 60,000 employees. Today it has a third fewer, at about 40,000.