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Will Sprint (S) Earnings Surprise Estimates this Season?

Zacks Equity Research

Sprint Corporation (S) is slated to report its second-quarter 2014 financial results on Jul 30. In the last reported quarter, the company had delivered a 33.3% positive earnings surprise. Let’s see how things are shaping up prior to this announcement.

Factors at Play this Quarter

Sprint is progressing on its network modernization and integration efforts, which will fortify its position in the wireless industry. Sprint’s core platform business depends upon the success of its multi-billion dollar restructuring program known as Network Vision. Sprint expects the Network Vision deployment to be over by mid-2014. Through this plan, the company is concentrating on the core Sprint platform, which includes CDMA, WiMAX and LTE technologies that led to the eventual termination of the Nextel platform (iDEN business) in Jun 2013. The company began the deployment of CDMA voice on 800 MHz in early 2013 and now has sites on air at approximately two-thirds of its markets. In addition, over 40% of its post-paid base has 800-megahertz voice capable devices. Further, the company plans to deploy 8T8R equipment on its existing network by mid 2014. In addition, the company is also expanding its wireless services in the automotive market and has struck a deal with Rogers Communications Inc. (RCI) to offer telematics services in Canada.

As part of the Network Vision strategy, in 2013, Sprint launched 4G LTE in 340 markets, covering more than 200 million point of presence (POPs), and expects to cover approximately 250 million LTE POPs by second half of 2014. In terms of 3G infrastructure, the company expects to see a 25% increase in 3G data speeds with new equipment and enhanced backhaul. The company also remains focused on developing the HD voice platform, which is expected to cover the entire nation by mid-2014.

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However, given more than 95% U.S. wireless penetration, competition is likely to remain intense, which could pressurize top and bottom-line results as carriers compete for market share. Although Sprint has started reducing its net loss in the post-paid subscriber base, we remain concerned about the return of this trend in the future. If this trend does not continue, revenues from Sprint’s wireless segment will come under pressure once again as it has been in the past several years. The decline in Sprint’s post-paid customer base is primarily attributable to intense price competition, ineffective marketing, less favorable network quality and delays in network modernization. As a result, the company expects increased post-paid churn in the first half of 2014 and is optimistic about a minor recovery in the second half.

On the flip side, Sprint apprehends a significant decline in Wireline adjusted EBITDA, both sequentially and year over year. On a full-year basis, the company expects Wireline adjusted EBITDA to decline approximately $400 million, with roughly $150 million being intercompany related. In addition, the carrier expects reduction in post-paid revenue per unit owing to introduction of cheaper plans such as Sprint Framily and Sprint Easy Pay equipment financing program. However, lower subsidy expenses are expected to partially offset these headwinds. Going forward, capital expenditure for the year is expected to increase to an estimated $8 billion owing to investment in Network Vision in the first half of 2014 along with expansion of Sprint Spark through 2014.

Earnings Whispers?

Our proven model does not conclusively show that Sprint is likely to beat earnings this quarter.This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Conversely, we caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revision momentum.

Zacks ESP: Currently, the Zacks Consensus Estimate for the second quarter loss per share is pegged at 4 cents, representing an improvement of 87.7% on a year-over-year basis, while the Most Accurate estimate for loss per share is also 4 cents. As a result, Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at 0.00% for Sprint.

Zacks Rank: Sprint carries a Zacks Rank #3, which increases the predictive power of ESP. However, when combined with a 0.00% ESP, it lowers the possibility of an earnings surprise.

Other Stocks to Consider

Here are some companies to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

TELUS Corporation (TU), with earnings ESP of +1.85% and a Zacks Rank #2.

BCE Inc. (BCE), with earnings ESP of +1.28% and a Zacks Rank #2.

Read the Full Research Report on S
Read the Full Research Report on TU
Read the Full Research Report on BCE
Read the Full Research Report on RCI


Zacks Investment Research