Credit Suisse Upgrades Sprint – Did We See This Coming?

Sprint Nextel Corp. (S) was bidding up more than 8.5% in the pre-market this morning after Credit Suisse (CS) upgraded the company, citing substantial progress with its turnaround effort. CS upgraded S, the U.S.’s third-largest wireless phone company, to outperform from neutral, and set a price target of $6.

Analyst Jonathan Chaplin said that S will benefit from sharp cost cuts, stronger sales of prepaid service and better retention of “postpaid” customers who sign up for annual contracts. The company has been losing as many as 1 million postpaid customers each quarter throughout the past few years, a number that CS expects to shrink. In related news, S said it paid down the $1 billion it owed on a $4.5 billion revolving loan and that it no longer has an outstanding balance (according to a Marketwatch.com report).

S is currently followed by more than 18 analysts, four of whom rate the stock as a strong buy, 12 as a hold, one as a moderate sell and one as a strong sell (this data as of end-of-day Friday).

The stock has been in a technical bearish trend both in the near term and during the past couple years, although it did recover somewhat earlier in the year. There has been a 20% nominal gap between the implied and historical volatility of S, with the implied volatility averaging about 78% and the stocks observed volatility coming in around 56%. Maybe those downside puts were a sale after all. S has been more volatile over the past week and with the 10.5% move today, observed volatility is on the rise again and the two lines are now intersecting.

But this article is not about volatility or charts necessarily; it’s about anecdotal observations combined with fundamental evidence of a company doing well and it not being realized yet in the stock price. While it can be dangerous to just take a couple opinions and make your decision to buy or sell a stock, I could not help but share this story as a S customer.

S is currently losing money – granted, its much less than last year – but this is certainly something we must take into consideration, as it can be extremely difficult for the average investor to create a pro-forma forward looking earnings expectation along with a P/E multiple that the market will find acceptable.

Having been a customer, and an extremely passionate one, since early 2008, I have noticed S making strides to retain customers and launch new and exciting products in the marketplace, including the Palm Pre, Blackberry Tour and HTC hero among others. I went to 19 different Best Buy stores and Sprint stores in five different cities and parts of the U.S. and observed the way the sprint customer service agents represented Sprint and its services and listened closely to customer feedback as well. I pay attention to casual conversations over the past year from dozens of different people from different social and economic backgrounds when they are talking wireless, I read through hundreds of blogs and tweets about S and its competitors.

I also noted the ratio of people in my social circle who use S currently versus other wireless carriers. While I did not write down every single thing that people said about S, I was able to weigh its advantages and disadvantages in the marketplace and form an overall opinion about the company and maybe help my decision making, or at least give me some confidence. If everything I heard about the company was negative, I would be less likely to buck the bearish trend and place a bullish strategy on the stock.
The fact is that S is far from perfect; they have been bleeding customers for some time now, but the company is doing everything they can to stop this bleeding and begin to grow again. While I think the upside is in the stock is limited in the near term there may be a place for S in the long term, with their competitive rates, improving customer service and retention along with solid coverage and speed of its 4G networks.
Maybe I might sell the 3-strike puts in December for 10 cents.

The anecdotal evidence I observed has partially manifested itself and may continue to do so, but I want to encourage all of you to be sure that you know the companies you are investing in and understand the business they are in if you are investing in them. Go to their websites, walk into their stores, use their products and read the research reports. Also, go with your gut. Many experts might disagree, but intuition and contrarian or forward thinking is a large part of investing.

As for the wireless space, I would be focusing more on the phone makers than the wireless providers for the global trade; more on that to come.