Stock Analyst Notes
by Morningstar Equity Analysts | 12/16/2013 10:30:00 AM
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A report in The Wall Street Journal indicates that Sprint S is considering making a bid for T-Mobile US TMUS during the first half of 2014. We believe neither Sprint nor T-Mobile has an economic moat currently because of each firm's small scale, and we've long held that they need to join forces to better compete with AT&T and Verizon Wireless. Scale is critical to maintain low network operating costs, procure phones on the best possible terms, and secure additional spectrum without endangering the balance sheet. A combined Sprint and T-Mobile would still trail AT&T, the nation's second-largest carrier, by a wide margin in the postpaid business, with 52 million customers served to AT&T's 72 million. However, the combined firm's strength in the less profitable prepaid market would make it roughly the same size as AT&T on the basis of total customers served. We believe a combined Sprint and T-Mobile would still operate at a disadvantage relative to AT&T and Verizon Wireless, but the gap would certainly be much smaller than either firm faces individually today. The key question is whether regulators will allow the U.S. market to consolidate to three nationwide players from four today. Ironically, the success that T-Mobile has had recently in attracting postpaid customers might actually work to its detriment here. For the entire note, click here.
Michael Hodel, CFA
Ligand Pharmaceuticals Inc. (LGND) advanced 3 percent #$%$&P said the company will replace SHFL Entertainment Inc. in its index tracking smaller companies.
Sprint Corporation recently announced the launch of HTC One Max on its network this week. The new phone features a 5.9-inch display and a Snapdragon 600 processor, and operates on Google Inc. (GOOG-Free Report) Android 4.3. We believe that this addition to Sprint’s product portfolio will add to its service revenues and accelerate the demand for its LTE services.
Sprint has a rich collection of smartphones including Android, tablets, USB modems, hotspots and routers, all of which are in vogue. Smartphones represented 92% of Sprint’s post-paid sales in the third quarter. Recently, the company also announced that it will offer Samsung Galaxy Mega on its network attracting customers to its 4G services. Sprint also activated over 1.4 million Apple Inc. (AAPL-Free Report) iPhones in the third quarter, 40% of which belong to new customers.
Over the long term, the company expects iPhone to generate $7–$8 billion in profits with the inclusion of 1–1.2 billion gross subscribers $6–$6.8 billion in profitability. Overall, the company sold around 5 million smartphones in the third quarter. Further, Sprint in collaboration with A&T Systems – a U.S.-based IT and telecom infrastructure provider –has received a mobile services contract from the U.S. Department of Veterans Affairs under which it will offer an array of wireless devices. We believe that continued growth in smartphone penetration will foster average revenue per user (:ARPU) improvement on the Sprint platform as well as result in lower churn rates given the contract package that is sold along with these smartphones.
In addition to smartphones and other equipment, the company is also focusing on improving its service plans with value added data plans that can accelerate post-paid wireless subscriber growth and ARPU with an improving churn rate. With regard to prepaid, Sprint’s multi-brand like Boost Mobile, Assurance Wireless and Virgin Mobile as well as innovative offers like $50 Monthly Unlimited plan
Sentiment: Strong Buy
Shares of flash-memory chip specialist SanDisk (NASDAQ: SNDK ) climbed 6% this morning after posting better-than-expected third-quarter results and receiving a buy-to-strong-buy upgrade from Needham.
So what: Along with the upgrade, analyst Rajvindra Gill boosted his price target to $90 (from $80), representing about 43% worth of upside to yesterday's close. While value investors might be turned off by SanDisk's solid run in 2013, Gill believes that the Q3 results -- revenue jumped 28% -- coupled with upbeat Q4 guidance indicate that the operating momentum might only be getting stronger.
Now what: Needham sees several tailwinds working in SanDisk's favor. "SNDK should continue to benefit from an underlying favorable mix shift toward SSDs (specifically enterprise) and embedded, along with improving GM within each of its product lines," noted Needham. "Additionally, SNDK plans to use 70% of its FCF to repurchase shares; thus we believe we could see $0.20-0.30 EPS upside to our [estimates] just on stock buybacks alone." Of course, with SanDisk shares hitting a new 52-week high today and trading at a 20-plus P/E, I'd wait for a wider margin of safety before jumping in.
SanDisk (SNDK) also climbed a bit more than 1%, to just below a 63.49 buy point in a first-stage cup-with-handle base. Analysts forecast the removable memory card and data storage leader to see a 173% surge in EPS to $1.73 when it reports results Wednesday.