Sprint (NYSE:S): Upgraded to Outperform at Credit Suisse, Added to Focus List with a $6 target
Credit Suisse Telecommunication team is making a major call on Sprint (NYSE:S) upgrading the shares to Outperform from Neutral with a $6 price target (prev. $4) and adding it to their Focus List.
Investment Thesis: CSFB notes that while they rarely add turnaround stories to the Focus List and fully recognize the degree of risk and volatility involved in this case, the Credit Suisse Investment Policy Committee (IPC) believes that Sprint is one of the few stocks in their coverage universe with a legitimate chance of doubling over the next 18 months (their optimistic scenario yields even greater upside with a fair value of $9). More importantly, based on extensive valuation and credit work, they believe the stock has limited downside risk with a floor value in the $2 range, particularly as consensus 2010 EBITDA estimates have recently moved down to very achievable levels.
CSFB believes the business is at an inflection point with revenue and EBITDA starting to grow over the course of the next two quarters. They are forecasting flat retail subscribers in 4Q09 for the first time since 2Q07 and expect growth to accelerate in 2010 and 2011. The return to growth will be driven by steadily moderating losses in postpaid, coupled with continued robust net adds in prepaid.
CSFB forecasts call for 4Q09 to be break-even for retail subscribers (first time since 2Q07). They see subscribers growing by more than 300k in the core for 2010, and they see Virgin Mobile adding an additional 1.2MM adds. Sub growth, coupled with considerable operating leverage and cost cuts should drive EBITDA and FCF growth, as well as multiple expansion.
Growth potential: Including the Virgin brand, the firm thinks net adds will increase 1.5M for 2010, driving 1% revenue growth in 2010 and 2% in 2011, after three years of declines. EBITDA should stabilize in 1Q10 and grow thereafter (they estimate 4% growth in 2011 while consensus is calling for EBITDA declines throughout 2010 and 2011).
Catalysts: 1) CSFB expects Sprint to launch a compellingly priced prepaid unlimited offer under the Virgin brand (on its robust CDMA network) soon after they complete the acquisition of Virgin Mobile (shareholder vote scheduled for 11/24/09). While expectations are low for this launch, the firm expects it to be successful (similar to Boost) and 2) S will report Q4 results in mid February.
Balance Sheet/Liquidity: The company’s CDS has tightened to 475bps from 1200+ back in March, indicating the fixed income market is becoming far more confident in the company’s prospects. This view is also shared by Credit Suisse's S credit analyst who believes the company has ample liquidity for 2010 and 2011 (S should end 2009 with a manageable Net Debt/EBITDA ratio of 2.8x).
CSFB is are forecasting EBITDA of $5.8BN for Sprint's exiting business, in line with the "sensible consensus" estimate.2 When they add Virgin, they arrive at EBITDA of $6.1BN. Firm expects revenue growth in 2011 of 3.1% which, when coupled with the operating leverage discussed above, should translate into EBITDA growth of 9%. CSFB's 2011 EBITDA estimate of $6.1BN excluding the contribution from Virgin Mobile is 5% above the consensus estimate of $5.8BN. Perhaps more importantly, their expectation of 4% EBITDA growth (again excluding VM) probably results in a higher multiple than the consensus expectation of EBITDA declines.
Valuation: S currently trades at 4.7x EV/EBITDA, in line with peers but with a much steeper EBITDA growth trajectory from current depressed levels. The stock also offers a 20%+ FCF yield. Finally, firm's conservative asset break up value is $2.
With a $6 target (and possible upside to $9) this one is going to generate some serious buying pressure today.