Sprint Nextel at a High Premium

Sprint Nextel Corp. (S) is a leading provider of business and wireless communications services in the U.S. The company continues to experience lower revenue due to weakness in its wireless business and associated customer retention problems.

Although postpaid churn (customer switch) improved in the recent quarter, it still remains a major concern as overall subscribers have opted for competitive services -- AT&T Wireless (T) and Verizon Wireless (VZ) -- possibly associated with complications of Sprint’s network integration of CDMA and iDEN technologies. Performance in the recent quarter has been tepid and management provided a disappointing outlook for the remainder of 2008 with further erosion expected of its subscriber base.

Sprint Nextel currently trades at 43.2x our 2008 EPS estimate, which is at a significant premium to the forward P/E ratio for the industry group average. On the basis of enterprise value (EV) to EBITDA (a common valuation metric for wireless carriers), the stock is also trading at a premium to the average for the domestic carrier segment.

We continue to believe that a lower margin revenue mix, incremental investment in business operations and start-up costs related to the build-out of the 4G WiMAX wireless infrastructure will have an adverse impact on the bottom line. Hence, we maintain our Hold rating with a $7.00 price target based on a 2008 EV/EBITDA of 4.9x. in proximity to the industry group average.

Anindya Barman contributed to the report.

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