Sprint: $20B Of iPhones? Not So Fast, Says JP Morgan

What everyone wants to talk about this morning is whether Sprint-Nextel (S) actually committed to paying that ungodly sum of money to get Apple’s (AAPL) iPhone.

The Journal yesterday said Sprint committed to $20 billion worth of iPhone purchases over four years. Apple is expected to unveil the next iPhone in a few hours from now.

Sprint shares are certainly reacting as if it’s true. The stock is down 39 cents, or 14%, at $2.34.

Well, FBR Capital’s David Dixon, who has an Outperform rating on Sprint shares, believes it’s true, and this morning, he charts what the impact may be to Sprint’s free cash flow and Ebitda. Sprint is to host an update on its business on October 7th, and he expects the company will confirm the deal with Apple at that time.

Basically, writes Dixon, the sell-off is overdone and the deal will ultimately not be as painful to Sprint as some might fear:

While 4Q11 subsidy pressure on EBITDA may be greater than expected, the net EBITDA and FCF impact in 2012 and 2013 may be less than expected. Specifically, we forecast a negative EBITDA impact from the iPhone of -$528M in 4Q11; -$426M in 2012; and -$460M in 2013 before turning positive in 2014 and 2015 at +$160M and +$680M respectively. From a FCF perspective, we see a $200M claw-back in incremental capex in each of 2012 and 2013 driven by lower 3G iPhone usage levels versus offloaded 4G device traffic on the 3G network.

But JP Morgan’s Philip Cusick this morning throws a bit of cold water on the matter. The story as reported is “unlikely to be fully accurate,” he writes. Cusick has an Overweight ration on Sprint shares.

For one thing, the device subsidy mentioned, $500, doesn’t seem real to him:

We estimate Sprint subsidizes each postpaid handset by $200 and high-end phones like the Evo by $260. While we could imagine a subsidy for high-end iPhones as high as $450 for Sprint, to get to the volumes discussed would require a lower spec�d device as well, and we cannot see how $500 would make sense across all price points. Sprint could just as easily give away the best 4G Android devices as subsidize iPhone by $500.

Also, if these units are not for prepaid, just postpaid service, then the commitment would represent 37% of Sprint’s handset sales the next four years, which is a percentage he finds hard to swallow. It was about that much at AT&T (T) this year, but just 20% at Verizon Communications (VZ).

Just don’t worry about it, Cusick advises: “Sprint shares seem to be driven mostly on concerns lately, and we believe the worst case at least will be allayed by Apple Tuesday and Sprint Friday. We would own Sprint at these levels.”