At least two sell-side analysts say the recent plunge in the bonds of Sprint Corp. is unjustified. Investor fears have been stoked by a recent article in The Wall Street Journal which argues that the long distance carrier may face network blackouts or a significant drain on its cash reserves as some of its wireless affiliates struggle to remain solvent, says Tim Caffrey, analyst at Barclays Capital. The company was also the subject of a number of nervous questions during a Moody's Investors Service conference call last week. It is rated Baa3, the agency's lowest investment-grade rating, and has a negative outlook. If Moody's drops the company to junk, it would force a number of portfolio managers to sell the bonds, as many are not allowed to own high-yield credits.
Sprint's benchmark 8.75% notes of '12 were bid at 95 last Thursday, having closed at 99.5 on Jan. 16, the day before the article appeared. Caffrey sees the bonds as eventually worth par. "There is enough value in the company even at current prices to pay off the debt they have outstanding," he says.
Cory Jackson, analyst at U.S. Bancorp Piper Jaffray, recommends shorter-dated issues, which have sold off even more than the 10-year paper. He sees the 6% notes of '07, which dropped from a recent high of 97 to a low of 89 last Wednesday, as offering upside potential, and says the mid- to high-90s is fair value. He believes Moody's will give the company a few quarters to generate free cash flow in its PCS wireless subsidiary and clean up its balance sheet before dropping it to junk.