Shares of cellphone company Sprint Nextel Corp. fell Monday after a downgrade by an analyst, who noted that credit-default swaps imply a substantial risk of bankruptcy in the next few years.
THE SPARK: Sanford Bernstein analyst Craig Moffett downgraded Sprint shares to "Underperform" from "Market Perform" in a morning note. He said credit default swaps are pricing in a 50 percent chance of the company seeking bankruptcy protection in five years.
"We suspect that this implied probability of bankruptcy will come as a surprise to most equity investors," Moffett wrote.
THE ANALYSIS: Underlying Sprint's shaky position is the disastrous acquisition of Nextel in 2005. Nextel subscribers have been leaving in large numbers, while Sprint is still saddled with the cost of maintaining the Nextel network, which is incompatible with its own.
Moffett said that the arrival of a new iPhone this year could be what finally pushes Sprint over the brink. The new phone may include the ability to use faster "LTE" wireless broadband networks, which AT&T and Verizon Wireless already have in operation. To catch up, Sprint is embarking on a costly and risky project to upgrade its network. But even if it succeeds, it will not have an LTE network that's competitive with AT&T's and Verizon's, Moffett said.
Sprint has committed to buying iPhones for $15 billion from Apple, placing an additional burden on its finances. Overall, it looks uncertain whether the company can repay debt maturing in 2015, Moffett wrote.
Sprint had no comment on the report.
SHARE ACTION: Sprint shares fell 15 cents, or 5 percent, to $2.74 in midday trading Monday. Its shares have recovered from a 52-week low of $2.10 in late January, but are down 57 percent from their high for the year of $6.45 in early June 2011.