Turnaround Woes… Moody’s Caution in Sprint (S, CLWR)

Sprint Nextel Corporation (NYSE: S) is a turnaround which just may never turn around.  If you see some of the caution issued by Moody’s today on the corporate debt side, the hopes for a rapid improvement may be yet again dimming.  Moody’s Investors Service has placed Sprint’s debt ratings on review for a possible downgrade.  There seems to be more than just one factor here at work for the company and its 44.7 million subscribers.  Moody’s said the review was based upon concerns that Sprint’s continued weak operating performance and a further deterioration in its relationship with Clearwire Corporation (NASDAQ: CLWR).  Also noted was the possibility of higher post-paid subscriber losses, coupled with the need for more cap-ex.

Moody’s noted that the long slide began after the Sprint-NexTel merger and that the operating performance has improved only gradually over the past few quarters.  In defense of Sprint, Moody’s did say that there were sequential improvements seen in churn rates and in gross subscriber additions along with average revenue per user.

The post-paid base has shrunk, albeit at a decelerated pace.  While growth may return in 2011, Moody’s expects that new subscriber growth is likely to come via pre-paid subscribers.  The lower churn is an improvement and Sprint is seeing its branded 4G service expand.

At issue is the rating on more than $20 billion in debt, and over $5 billion is coming due from 2011 to 2013.  While Sprint’s liquidity is strong and it is expected to have more than $5 billion in cash at year-end, there risks such as cap-ex, execution, the Clearwire relationship and future financial obligations that need to be considered.

All of the factors could bring a downgrade to Sprint’s ‘Ba2’ rating, which would move the wireless telecom player further away from investment grade.  Moody’s further noted that a downward rating momentum could occur if Sprint’s leverage is likely to be sustained at or above 4.0 in its total debt/EBITDA.  Moody’s would  also like to see Sprint’s post-paid churn rates remaining under 2%.

Our own concern has been far deeper than Moody’s and what some of the few remaining bulls have noted.  Perhaps the single biggest effort against the company is its lineup of smartphones.  Despite the HTC EVO 4G phone, AT&T and Verizon have kept up the dominance of the iPhone, Android and others.  Maybe it is an unfair comparison, but this is the issue that keeps coming up.

Sprint shares are down 4.4% at $3.85 on fairly active trading versus a 52-week trading range of $3.03 to $5.31.

JON C.  OGG