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.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  2. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  3. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  4. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  5. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  6. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  7. Stock Analysis

    The Safest Stocks You Can Invest in Right Now

    These stocks are likely to hold up better than others in a bear market, but there's a twist.
  8. Investing Basics

    5 Reasons to Expect Lower Stock Returns

    Lower stock returns are likely here to stay for some time. Here are five reasons why.
  9. Investing Basics

    What to Cut From Your Portfolio Right Now

    Owning stocks may shortly become too scary for your portfolio. Here's why, and here are some alternatives.
  10. Personal Finance

    Careers: Equity Research Vs. Investment Banking

    Equity research is sometimes viewed as the unglamorous, lower-paid cousin to investment banking. In this article, we compare the two careers.
  1. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  2. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  3. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  4. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  5. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  6. Impact investing

  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!