Sprint Nextel (S) continues to frustrate its long-suffering shareholders. But now is not the time to follow them to the exits. The stock is priced for value investors willing to wait for a turnaround.

Last quarter, Sprint Nextel delivered a pretty dismal set of numbers. The company signed up half a million low value prepaid wireless subscribers, but only 210,000 post-paid customers.

To put that in perspective, Verizon Wireless (VZ), the Verizon and Vodafone (VOD) joint venture, and Cingular Wireless, co-owned by AT&T (T) and Bellsouth (BLS), each saw news subscribers grow by more than a million over the same period. Even worse, Sprint Nextel's average revenue per user (ARPU) fell again in the quarter.

The news isn't good. But there are reasons to think things won't get worse. In fact, if you look hard, you can find some signs pointing to recovery.

The road to any kind of recovery starts with admitting to problems. A year after the Sprint-Nextel merger closed, management now confesses that it has bungled efforts to weld together two separate national wireless networks.

The company also confesses that more work is needed to stem churn rates and regain market share given away to Verizon Wireless, Cingular Wireless and Deutsche Telekom's (DT) T-Online. Sprint Nextel has announced a long list of initiatives to turn things around.

Of course, a turnaround strategy could take many quarters to show meaningful results. So in the meantime, it's worth considering the stock's valuation.

The shares are down 15% since Sprint Nextel delivered second quarter earnings and cut guidance. Now at a two year low, the shares are down almost 30% since Sprint announced its merger with Nextel at the end of 2004.

The shares have fallen far enough. At $16.62, the stock is priced at a ridiculously-low 6 times 2007 free cash flow and offers a whopping 10% free cash flow yield. Priced any lower, Sprint Nextel's free cash flow will make it an eye-catching takeover target.

With annual free cash flow of $5 billion expected for 2006 and 2007, Sprint Nextel has plenty of room to make good on its promise to buy back $6 billion worth of shares. Buybacks over the next 18 months will shrink the company's share count by 12%, boosting value per share.

What's more, Sprint Nextel shares trade at a big discount to AT&T, despite AT&T's lower growth businesses. Sprint is priced at a mere 4 times EBITDA, while AT&T trades at more than 7 times.

The discrepancy comes down to AT&T's track record of successfully orchestrating mergers that create synergies. Last year's SBC-AT&T merger has proceeded without a hitch, and investors expect the same from AT&T's more recent purchase of Bellsouth. If Sprint-Nextel can get its house in order, the valuation gap ought to narrow, which will translate into hefty gains for investors.

Of course, with few short-term catalysts available to ignite them, Sprint Nextel shares could be dead money for some time. But, long-term investors should not write-off a turnaround. Patience will pay-off.

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