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Sprint: Good to Hold

Zacks Equity Research

We are maintaining a Neutral recommendation on Sprint Nextel Corporation (S) – the third-largest wireless carrier in the U.S. The company is characterized by wide network coverage, attractive product and service offerings and a well-designed restructuring program.

We believe that Sprint is concentrating on three main objectives to better its performance levels in the coming months. These include subscriber and revenue growth in the core Sprint platform business, massive conversion of Nextel customers to the Sprint platform and overall improvement in its operating base to generate higher profitability.

Sprint is also banking heavily on its multi-billion dollar restructuring program known as Network Vision. This plan focuses on the core Sprint platform, which includes CDMA, WiMAX and Long-Term Evolution (:LTE) technologies, and eventual termination of the Nextel platform (iDEN business).  We believe that the closing of Nextel platform will provide savings from utilities and maintenance, and additional savings from tower rent,  going forward.

Recently, Overland Park, Kansas based Sprint expanded its high-speed 4G LTE technology in the country by adding 11 new markets. The new markets include Harrisburg, Pennsylvania; South Bend/Mishawaka, Indiana; Muncie, Indiana; Peabody, Massachusetts; and Salina, Kansas. These strategic initiatives of the company are well supported by its strong financial position with healthy cash on the balance sheet.

However, Sprint’s not-so-impressive results for the third quarter keep us from getting over optimistic about its future. The company posted a loss for the three-month period and revenue failed to meet our expectation.

Additionally, in the long-distance business, Sprint’s overall position has been weakened due to competitive technologies, including Voice-over-IP (VoIP) and cable telephony as well as lower pricing. We expect the company’s wireline margins to be adversely affected in the coming quarters by the loss of Time Warner Cable VoIP.

The company is also struggling to deal with the loss of post-paid customers to other industry players such as Verizon Communications Inc. (VZ) and AT&T (T). This shrink in subscriber base was primarily due to intense price competition, ineffective marketing, less favorable network quality and delay in integration of back-office functions with its acquired units.

Hence, we expect Sprint to trade at par with the broader industry and advice investors to hold on to the stock.

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