Goldman Remains Neutral On Sprint Stock, Positive On Its Bonds

The turnaround in Sprint Corp’s (NYSE: S) fundamentals supports the recent upturn in the stock, which has outperformed the company’s bonds, Goldman Sachs’ John Marshall said in a report, while adding that the divergence had created an opportunity.

Marshall maintained a Neutral rating on Sprint’s stock and reiterated a Constructive stance on credit.

Stock Outperforms

Sprint’s shares have gained 33 percent since July 25, when the company reported its F1Q16 results. This compares with a mere 1 percent gain for the S&P 500. Sprint’s stock is now trading at a slight premium to other large cap wireless peers, reflecting expectations that the company’s turnaround efforts would drive above-average EBITDA growth in 2017, Marshall mentioned.

The analyst added, however, that even if Sprint does achieve the expected EBITDA growth, it is unlikely to generate significant FCF next year. He explained, “The key reason is that Sprint plans on materially densifying its wireless network, meaning it intends to deploy tens of thousands of ‘small cells’ in order to boost capacity using its high frequency 2.5 GHz spectrum licenses.”

Convergence Opportunity

While Sprint’s shares have climbed, the move in its 5Y CDS spreads is merely one-fourth the size of the equity move, Marshall pointed out. For the past couple of year, Sprint’s equity and bonds have traded in-line. The recent outperformance of Sprint’s stock suggests that either equity would move 20 percent lower or the 5Y CDS spreads would tighten by more than 200bps, in order to close the current divergence.

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