Why Sprint expects its capital expenditures to decline

Why Sprint's stock plunged after the earnings announcement (Part 11 of 16)

(Continued from Part 10)

Telecom sector demands high capital expenditure investment

The telecom sector is very capital-intensive. To give you an idea, let's compare the ratio of cash flow from operations to capital expenditure among major telecom operators in the U.S.

The higher the ratio, the better the company is financially. The higher ratio leads to higher free cash flow. This allows the company to pursue opportunities to enhance shareholder value. This ratio also indicates the company's ability to invest in itself through capital expenditures.

As the chart below shows, Verizon (VZ) and AT&T (T) have the highest ratio of cash flow from operations to capital expenditure of ~1.7. However, this ratio is less than one for Sprint (S) and T-Mobile (TMUS). This shows that Sprint and T-Mobile are in a weaker financial situation.

Sprint is reducing its spending on capex this year

During the conference call to announce earnings, Sprint's management mentioned that they're focusing on reducing capital expenditures (or capex) to maximize capital efficiency. The company expects the capex spending to be below $6 billion for 2014—compared to ~$7 billion that it expected earlier. Incidentally, AT&T is also expecting its capex spending to reduce in the second half of 2014 .

Management also mentioned that the increased coverage and capacity of the Long-Term Evolution (or LTE) network allowed for data migration to LTE. It reduced the spending need on the 3G network that was expected earlier. The company is also seeing lower maintenance on capitalized spending this year. The lower capex spending should help Sprint become stronger financially.

You could gain exposure to Sprint through exchange-traded funds (or ETFs) like the iShares U.S. Telecommunications ETF (IYZ). IYZ has high exposure to Sprint.

Continue to Part 12

Browse this series on Market Realist:

• Part 1 - Must-know: Sprint's stock decreased after the earnings
• Part 2 - Why Apple's iPhone 6 could instill life into Sprint
• Part 3 - Why Sprint is targeting prime customers to improve its churn rate

• Investment & Company Information
• Finance
• capital expenditure
• Sprint

 

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