Speaking on Sprint by Malcolm Berko on Creators.com

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Speaking on Sprint

Dear Mr. Berko: What do you think about Sprint, the cell phone company that owns Nextel? I'd like to buy 2,000 shares because I think it's on the rebound from a disastrous CEO who ran the company before the current CEO, Daniel Hesse, took over. I could afford to speculate with a lot more, but I want to keep my powder dry because I think there are more good, cheap stocks out there that will recover in the next year or two. — B.L., Aurora, Ill.

Dear B.L.: Sprint (S — $3.75) was one of those companies I used to love to hate because its past CEO, Gary Forsee, was an uninspiring uncommunicative dullard who couldn't manage a two-car funeral, was intensely disliked by S's employees and had a sub-arctic personality. It will probably take another year before the current CEO, Hesse, can toss out Forsee's garbage and repair the damage left behind from his moribund management style.

Sprint's 49 million wireless subscribers helped put $32 billion in revenues on the books in 2009. The company seems to be gaining good footing against competitors, and Hesse has worked hard to repair Forsee's negative progress. Meanwhile, customer service has improved markedly; there's a better choice of handsets, certainly much better network performance and greatly improved technology. And while S has lost money in the past two years, 2010-2011 should bring some sunshine to Sprint's income statement. So Credit Suisse, recognizing S's earning potential, recently gave Sprint an "outperform" rating.

Meanwhile, management is doing a swell job of containing costs, improving employee morale and building free cash flow. And a recent network management agreement with Ericson, staff reductions, call center closures and capital spending cuts are improving margins as well as cash flow.

I think S is a swell long-term (about two-year hold), moderately speculative buy.

Management recently purchased Virgin Mobile USA for $483 million plus assumption of $205 million in debt. This will add some 5.2 million new customers to S's base, and the synergy is almost nearly perfect because Virgin subscribers have been using Sprint's network. Like prepaid vendors, Virgin Mobile appeals to customers who lack a credit history or don't have the income to qualify for long-term contracts or do not want to leave a record of their calls. The market for these customers has expanded and will continue to do so as the economy continues to push more traditional wireless customers to cheaper plans.

I also like Sprint because there's a remote possibility that Deutsch Telekom (DT — $14.35), with $90 billion in revenues, may propose to Sprint. Last September, DT was mewing about a takeover at $6.25 a share, and many observers believe S is more attractive today than it was in July/August of last year.

So yes, take a 2,000-share flier. The company has a book value of $6.40, current liquidity of $6 billion, which is a swell cushion for future debt maturities, and DT may want to revisit its thoughts on Sprint. If you do buy 2,000 shares, I'd also recommend owning 500 shares of "PPlus" 7 percent Sprint Capital Certificates (PYG — $16.36) issued at $25 and pays $1.70 with a current yield of 10.6 percent. The purchase of 2,000 S and 500 PYG will cost you about $16,200. So the $850 in dividends will give you a 5.25 percent return while you wait for good things to come. And if DT does propose, your PYG (which is a $25 par) could run up to the $22-$23 level. Then, the Lord willing and the crick don't rise, DT may even redeem PYG at $25.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.