Greed Will Make You Lose!

“The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works…” that’s a memorable quote from the controversial Gordon Gekko in the movie Wall Street from 1987. However, that doesn’t apply in real life, or at least not all the time. If you are too greedy looking for profits and don’t pay attention to every aspect of a company you’re investing in, you may end up paying the ultimate price of greed. And that is, losing your money!

For those of you, who are investors of Sprint (NYSE: S), and got in somewhere at the beginning of last year (2012), nothing is sweeter than watching your investment almost triple in value. Shares of Sprint were trading on the low range of the $2 mark during January 2012 and have just touched their 52 week highs of $5.97 this Tuesday. Yes, that is a gain of +184% from its 52 week low. But, staying on this boat for 2013 may be too dangerous and greedy if you ask me.

Let’s take a look at the reasons that made me skeptical of Sprint’s future performance:

1 Customers.

As I wrote in a previous article titled, " BEWARE! Sprint is Actually Losing Customers!" where I point out in detail how management is actually telling us in their latest earnings release that they are losing customers. And to add to that point, I've been talking to people in my circle of friends and in the communities I am a member on Google+ (which of course is in no way a proper sample, but can give me a quick sense of the sentiment about the company), and I found out that either people has left, is leaving or planning to leave Sprint, but, no single positive comment, supporting the company or its services was offered.

2 Statements of Operations.

We know that they’re not profitable and this has been for a good while now. But, did you know that metrics are not improving? And that is certainly needed to get to a profitable stage.

Statement of Operations (YTD Comparison)(in millions)
	9/30/2011	As % of Rev	9/30/2012	As % of Rev	Change
Revenue	$24,957	100	$26,340	100	n/a
Cost of Services	8,170	32.74	8,277	31.42	(1.32)
Cost of Products	5,426	21.74	6,912	26.24	4.50
SG&A	7,131	28.57	7,208	27.37	(1.20)
Depreciation & Am	3,684	14.76	5,050	19.17	4.41

Revenue has grown, it’s true, but it has been driven more by the increase in ARPU (Average Revenue per User) rather than by organic growth. During the first 9 months of 2012, ARPU was about $60.64 compared to $56.83 during the same period the year before. This is because of more smart phones that are being sold requiring customers to pay extra for that service.

Even with the ARPU improving about 6.7% from a year ago there’s no guarantee that Sprint will get back to a profitable stance. For this to happen, growth must come from users, and that is not happening. They can only raise prices so much before pushing another chunk of customers out of the door.

Cost of Services, it’s a metric that improved from a year ago along with Selling General & Administrative. However, the improvement in those to areas (less than 1.35% each) is not enough to make up for the increase in Costs of Products (4.5%). The latter is probably due to the introduction of the iPhone from Apple (NASDAQ: AAPL), which by the way, the company has sold about 1.5 million since inception, and the subsidies they have to pay.

Depreciation and Amortization also increased significantly during the YTD period. I know this is because of the accelerated depreciation of the already planned and discussed Nextel platform shutdown. Nevertheless, please remember that during 2013 the remaining portion of the Nextel equipment will be depreciated to zero, therefore, causing this metric to still be a major factor for this year’s statement of operations.

3 Balance Sheet & Peer Comparison.

Please read the table below while following the comments underneath it.

Balance Sheet Comparison vs. Peers.
TICKER	Book Value		Cash x Share		Debt/Cash		Debt/Equity
	12/31/11	09/30/12	12/31/11	09/30/12	12/31/11	09/30/12	12/31/11	09/30/12
S	$3.80	$2.83	$1.86	$2.11	6.78	6.39	3.32	4.76
VZ	$12.62	$13.19	$4.90	$3.62	13.94	18.77	5.41	5.14
ATT	$18.62	$17.69	$0.56	$0.39	51.75	74.83	1.56	1.64

AT&T (NYSE: T) is the strongest of the group when comparing all four aspects on the table. Although it may seem dangerous to have a debt-to-cash ratio of 74.83 is not as bad when there is not much debt on the books, which bring me to the point of debt-to-equity ratio of only 1.64. In my opinion having more debt on the books than equity is not a good thing, but I must realize that leveraging has become a normal practice of corporations nowadays, and AT&T is certainly the better one of the three.

Verizon (NYSE: VZ) on the other hand, seems to be doing well too. Though, is the highest leveraged of the group is the only one of them that actually improved its balance sheet by decreasing debt and increasing its book value.

This leaves me with Sprint. While its cash per share grew considerably well (+13%) the truth is that what troubles me most is the piling of debt. Debt-to-equity ratio spiked 43% while book value decreased 25%. Sprint is has way too much debt on its books for a company of its size.

4 Other.

Although the deal with SoftBank is definitely a good sign for the company, and it comes with more cash that, can, and it’s being used in the new 4GLTE technology that Sprint is deploying in order to compete better with AT&T and Verizon. This deal still has to be approved by the regulators and will take some time before it happens.

Clearwire’s (NASDAQ: CLWR) deal, even with the threat that Dish Network (NASDAQ: DISH) may take it away because of the higher bid they put out a couple of days ago, might still happen as we can read on a statement that was released by Sprint on January 8 that says:

“Sprint believes its agreement to acquire Clearwire, which offers Clearwire shareholders certain and attractive value, is superior to the highly conditional DISH proposal.

In contrast, the DISH proposal includes a series of interdependent commercial agreements, debt and equity purchases and spectrum sales, which together with the other conditions required by DISH to complete the transaction, makes the proposal not viable. In addition, the DISH proposal would require Sprint to voluntarily waive rights that it holds as a stockholder of Clearwire and that it possesses through various vendor and customer contracts that significantly predate Sprint’s proposed acquisition of the remainder of Clearwire. Sprint does not intend to waive any of its rights and looks forward to closing the transaction with Clearwire and helping consumers across the country realize the benefit of this combination.”

This deal also needs time to materialize (if it does), and time, dear investors, is an expensive commodity.

5 The last and strongest of the reasons.

The ultimate reason why I believe Sprint stock will lose value on 2013 is the very fact that, since 2006 (yes, that’s 5 full years) they show no profit, 2012 will be once again a no profit year and surely, given the facts, on 2013“THEY WILL NOT BE PROFITABLE”.

Why would you put in your money on a company (Sprint) that sells for 2.10x its book value (as of 1/10/13 close), pays no dividend and loses money, when you can buy another (AT&T for example) that sells for less (1.94x book value), pays a dividend and its actually making money?

Greed, as it ultimately happened to Gekko on that movie, will make you lose dearly. Please be careful and vigilant with your money, if you don’t watch it yourself no one will.

If you like my work and want to support me or read more articles I published, please subscribe on the top right corner of this page.

You can also like me on Facebook or join my community on Google+