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. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  2. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  3. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  4. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  5. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  6. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  7. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  8. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  9. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  10. Stock Analysis

    Are the Brands Millennials Love a Good Buy?

    Millennials make up a very big — and thus important —c onsumer generation. So if they love a brand, its stock is likely to outperform, right?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

You May Also Like

Trading Center