Sprint (S): What's In Store For The Stock In Q2 Earnings?

U.S. national wireless carrier Sprint Corp. (NYSE:S) is slated to report second-quarter 2016 financial numbers before the opening bell on Oct 25.

Last quarter, the company posted an impressive positive earnings surprise of 25.00%. Let’s see how things are shaping up for this announcement.

Factors at Play

Of late, Sprint has been trying all means to check churn and fend off competition. Also, the company has been continually making efforts to lure customers from rival carriers such as AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) by offering attractive promotional plans and discounts. This in turn has led to high cash burn and heavy losses. Notably, with more smartphone launches coming up, specifically iPhone 7, we expect the promotional offers to dent margins going ahead.

Further, Sprint’s decision to skip Federal Communications Commission’s (FCC) 600 MHz low-band airwaves auction will save cash for the company but will limit its scope for network upgrades and expansion, which may hurt operations over the long term. Additionally, the company has a debt-laden balance sheet, negative operating cash flow and has been witnessing losses since 2007. In order to deal with this, the company has been preparing to sell and leaseback a little over 10% of its total airwaves (wireless spectrum) holdings to raise cash. Most of these spectrums will be from 2.5 GHz frequency bands while some will be of 1.9 GHz frequency bands.

Nevertheless, we expect the company to benefit from its newly initiated growth and investment plans. The upcoming launch of its 5G network and promotional schemes for LTE network advancements bode well. In Sep 2016, Sprint and Nokia (HE:NOKIA) Corp. (NYSE:NOK) promoted their three-channel carrier aggregation in the Kansas City’s LTE Plus Network which was followed by a live telecast at Kauffman Stadium in Kansasa City and at Soldier Field in Chicago. The three-channel carrier aggregation was advertised using the latest network technology devices – the Samsung (KS:005930) Galaxy Note7, Galaxy S7, S7 edge, HTC 10 and LG G5, each having Internet download speeds of more than 230 Mbps (Mega Bits Per Second). Sprint has already expanded the three-channel carrier aggregation in more than 500 cell sites in Chicago.

Earnings Whispers

Our proven model does not conclusively show that Sprint is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here as elaborated below.

Zacks ESP: Sprint has an earnings ESP of -14.29%. This is because the Most Accurate estimate stands at a loss of 8 cents while the Zacks Consensus Estimate is pegged at a loss of 7 cents.

Zacks Rank: Sprint has a Zacks Rank #3 (Hold) which increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

A Key Pick

Here’s a company that has the right combination of elements to post an earnings beat this quarter.

Apple Inc. (NASDAQ:AAPL) , with an earnings ESP of +1.21% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. The company’s earnings surpassed the Zacks Consensus Estimate in three of the previous four quarters.

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