Omega Advisors' Thesis on Sprint Nextel (S): Q2 Letter ~ market folly

Thursday, August 1, 2013

Omega Advisors' Thesis on Sprint Nextel (S): Q2 Letter

Lee Cooperman's hedge fund firm Omega Advisors is out with their Q2 letter and in it they detail their thoughts on Sprint Nextel (S), their largest position at the end of the second quarter:

Omega's Thesis on Sprint Nextel

They knew that a lot of their position would be tendered to Softbank, but they still thought shares in the 'New Sprint' were attractive so they bought shares even after the quarter.

Omega writes, "We continue to like Sprint for three reasons. First, we continue to see the same meaningful margin expansion  opportunity that attracted us to the company for our initial investment, with the added benefit that the Softbank  merger should accelerate the pace of margin expansion and likely results in a higher terminal margin. Second,  during the course of the bidding process we had the opportunity to engage with Softbank CEO Masayoshi Son.  His track record speaks for itself. We found Mr. Son to be engaging and forthright, and believe that the  opportunity to be his partner as he creates value for Softbank through Sprint is highly attractive. Third, with  the acquisition of Clearwire, Sprint possesses unique spectrum assets which completely change the economics  of the business. Old Sprint operated on 35 Mhz of spectrum versus AT&T and Verizon at approximately 110  Mhz. Spectrum is the raw material for wireless, and a spectrum deficit resulted in structurally lower margins and lower returns on capital. However, Sprint has now shut the Nextel network and will repurpose approximately 14 Mhz of low frequency spectrum for the Sprint network.  Additionally, Clearwire is able to  operate on a single bandwidth in excess of 130 Mhz on average, including approximately 160 Mhz in the top  100 markets where capacity constraints are most likely to emerge. By virtue of having a significantly fatter  pipe than its competitors, Sprint should achieve both better network performance and much higher returns on  incremental capital going forward. It is true that the capital expenditures will be large over the next 24 months  but with dramatically higher returns on incremental capital, we think Sprint will emerge as a share gainer with  an attractive financial profile."

They feel that if their thesis is wrong, it's due to the US wireless industry itself not being able to support 4 major carriers.  In such a case where T-Mobile and Sprint can't produce solid returns, then the likelihood of a merger between the 3rd and 4th largest players wouldn't be frowned upon (which provides downside protection).

Cooperman Likes Thermo Fisher Too

It's also worth highlighting that Omega also really likes Thermo Fisher Scientific (TMO) as they see end markets likely to accelerate.  They see mid-to-high teens EPS growth for the company due to a combination of margin expansion, accretion from the Life Technologies (LIFE) deal, and deleveraging.

Shares of TMO have seen a lot of interest from other major hedge funds as well.  As we pointed out from Viking Global's Q2 letter, they started a stake in TMO in Q2.  And then Larry Robbins' Glenview Capital also holds TMO as its largest position.

For more on Lee Cooperman's firm, head to Omega's thesis on Covidien & Sirius XM Radio.

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