Sprint Has Room To Run

Gathering Speed
The Sprint-Nextel merger in August sparked investor skepticism at first, but lately the Street has turned upbeat. Shares of the combined company have jumped from 22 in mid-February to 26.65 on Apr. 19. The bulls say the runup at Sprint Nextel (S ) is just getting started. Judged on the basis of its price-to-cash-flow, price-earnings, and debt-to-equity ratios, "Sprint is by far the cheapest U.S. telecom stock," says Ivan Krsticevic, senior portfolio manager at Elliott Management, which owns shares. Sprint, a leading provider of wireless and wireline services, is "a large-cap opportunity that we expect to produce an annual return of 27% for the next three years," says Krsticevic. He sees the stock at 43 by then. One factor that may boost Sprint is a possible stock buyback. The merged company has strong cash flow and little debt, and with Sprint's planned spin-off this year of its wireline services, estimated at $18 billion, "it could buy back nearly 40% of its stock at current prices," he says. Thomas Lee of J.P. Morgan Securities (JPM ), who rates the stock "overweight," says Sprint could repurchase $14 billion worth between now and 2007 and still remain underleveraged. Lee forecasts that earnings before interest, taxes, depreciation, and amortization (EBITDA) will rise from $13 billion in 2006 to $16.6 billion in 2007. He sees the stock at 38 by yearend, based on a sum-of-the-parts analysis, after the spin-off. Lee figures Sprint will earn $1.58 a share this year and $2.14 next, vs. 2005's $1.47. A briefing in early April by Chief Operating Officer Len Lauer reinforced Lee's belief that the outlook for 2006 and 2007 is favorable.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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