Jefferies Cuts Sprint Target To $3, Sees 'No Relief For Cash Burn'

In a report published Thursday, Jefferies analyst Mike McCormack maintained an Underperform rating on

, while reducing the price target from $4 to $3. Analyst Mike McCormack said that lease accounting benefits seemed to be "masking" weakness in Sprint's cash flows. The company's EBITDA guidance calls for about 12 percent growth in FY15. However, after adjusting for the benefits of lease plan accounting, EBITDA is likely to be down nearly 18 percent, "despite still benefiting from EIP accounting," McCormack mentioned. In the report Jefferies noted, "Trends are even more troubling when drilling into a comparable CFO number. After adjusting for secondary channel capitalized handset costs, we estimate that Sprint will use nearly ~$1.1bn of cash before capital expenditures in FY15." McCormack added that the upcoming network densification plan seemed to be a "stop-gap measure" to address structural issues, which are likely to be fixed only by "a meaningful investment in low- or mid-band spectrum." The conservative estimate for the plan's cost is an incremental ~$1-2bn per year, in addition to run rate wireless capital spending of ~$4-5bn for 3 years. "Sprint may find creative ways to involve vendor financing, but the leverage profile only becomes further troubling," McCormack wrote. "With industry-high leverage, negative FCF generation and a possible need to participate in upcoming Broadcaster auction, we see further downside risk to the equity and lower our PT to $3 from $4," the report stated.