The Case for Sprint (NYSE:S) During the Clearwire (NASDAQ:CLWR) Fracas

Writing earlier this year on May 12, after shares closed at $4.15, I argued the case for Sprint Nextel (S), citing improved quality, the prepaid pipeline and improved marketing.  While the stock held higher for most of the intervening period, hanging above $5 a share for most of the end of May, Sprint is back down again, treading the $4 line.

What’s going is on is that Sprint is at loggerheads with Clearwire (CLWR), 56 % owned by Sprint, which has been building the 4G network Sprint uses.  Sprint’s ability to control Clearwire apparently deteriorated with new developments in antitrust law, leaving Sprint at the behest of Clearwire’s differing priorities. 1  Meanwhile, Clearwire needs cash, and is squeezing Sprint for it, recently announcing staff cuts that threaten completing the network on schedule. 2

Will Sprint resolve this spat so that it’s shares are a bargain now, or is buying into Sprint just throwing good money after bad?  I believe it’s a good opportunity.

Despite the bad blood, the interests of the players are aligned.  Sprint needs Clearwire’s higher-speed network on schedule to capitalize before Verizon (VZ) and T-Mobile (owned by Deutsche Telekom AG (DTEGY)) catch up, and Sprint is Clearwire’s dominant business partner and majority owner.  Can they find common ground soon?

A key intangible is that Sprint just sparked up its 4G network in New York City.3 Tech connoisseurs can debate the nuances of how Sprint’s 4G will compare to competitors, but the here and now is that Sprint’s 4G is up and running on Wall Street – so far without any major hitches akin to the antenna problems during the iPhone 4 rollout.

As a practical matter this means that Manhattan financiers interested in lubricating a Clearwire deal will have easy access to firsthand information on the quality of Sprint’s 4G.  This situational factor increases the odds that Clearwire will be able square away its financing challenges, whether with cash from Sprint, other sources, or both.

Concededly, Clearwire may not be the only factor holding back Sprint’s stock.  Rumors of Apple (AAPL) opening up iPhones in the United States to Verizon have become accepted as fact,4 apparently leaving Sprint out in the cold in the iPhone market.  But even though the Android-based HTC (listed on the Taiwan Stock Exchange) EVO phone offered for Sprint 4G lacks iPhone-like cult appeal, its reviews and demand are strong.5  The Samsung (SSNLF) Epic 4G recently introduced by Sprint has also been well received. 6

The iPhone dynamic may well keep Sprint shares undervalued until the company proves its mettle after AT&T (T) loses iPhone exclusivity – either by continuing to improve its numbers despite a Verizon iPhone or by somehow getting in on the iPhone action.  Consequently, if Sprint successfully executes, the potential for the greatest returns will not be near-term.  But the Clearwire situation may provide those willing to take the risk with a head start on those profits.

Disclosure: The author is long Sprint Nextel (S) and AT&T (T) as of the original publication of this post.  The author does not hold a securities position in Clearwire (CLWR), Verizon (VZ), Deutsche Telekom AG (DTEGY), HTC (TAIEX: 2498), Apple (AAPL), or Samsung Electronics (SSNLF).  This disclosure includes holdings of immediate family members.

Disclaimer: The information provided in this post does not constitute professional investment advice, and should only be used in consonance with all available information, including the opinion of a professional adviser, to make an investment decision.

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