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Stock Analyst Update

Sprint PCS Sets Wireless Pace

It's amazing the noise 1.2 million new users can make.

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What Happened?
Sprint PCS (PCS) on Thursday announced that revenue in the December quarter increased 84% from the prior-year period, driven by the addition of 1.2 million subscribers in the quarter. Sprint continues to set the pace in the wireless industry: Roughly 1 out of 6 new cellular phone users selects its service. Sprint's strong performance is highlighted best by the growth in EBITDA (earnings before interest, taxes, depreciation, and amortization), which outpaced that of sales; more customers and scale efficiencies combined to improve EBITDA by $522 million from a year ago, to $21 million in the quarter. Management anticipates 4 million new subscribers and a $1.6 billion improvement in EBITDA in 2001.

What It Means for Investors
As Sprint chalks up quarter after quarter of torrid subscriber growth, we grow increasingly confident of its position near the top of the wireless industry. We particularly like the fact that Sprint increased monthly average revenue per user (ARPU) by a couple of bucks from a year ago, despite adding so many subscribers. The reason that more subscribers are spending more money is simple: 50% of Sprint's customers, including its growing number of corporate clients, have signed annual contracts. These contracts promote behavior that tends to increase ARPU, like higher minutes of use and a lower rate of customer disconnect.

After three consecutive quarters of positive EBITDA, we think Sprint has reached the Rubicon in terms of operating losses. If Sprint adds another 4 million subscribers in 2001, bringing its year-end total to 15 million who spend an average of $60 per month, revenue should grow 70% to nearly $11 billion in 2001. In that case, estimated EBITDA of $1.6 billion is probably conservative. We are confident that Sprint's strong performance is proof that it is one of the winners in the fast-growing American wireless industry. Although we liked the stock better a month ago before it soared 70%, we remain convinced that it is a good long-term pick for investors looking for an idea in the wireless industry.

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Todd Bernier does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.