Wall Street loved Sprint but not Cerner in 2016’s local stock rankings

On Wall Street, winners and losers can change lanes quickly, and local stocks offered proof during 2016.

Sprint shareholders are used to looking for their stock’s performance ranking well down the leader board. But in 2016, their shares landed topside by climbing a heady 132.6 percent.

And look who is among the local laggards.

Cerner Corp., a dynamo of growth in the Kansas City area economy, saw its shares fall 21.27 percent.

Both companies face big tests in the year ahead, as do other big local names such as Kansas City Southern and H&R Block. Their shareholders could prosper if the companies are up to 2017’s challenges.

Most local companies’ shareholders will look back on 2016 fondly after a rough 2015. Gainers outnumbered losers 3-to-1 in a year in which major stock indexes climbed to record levels.

Halfway point

Calendars at the Overland Park headquarters of Sprint should note that the wireless carrier is nearly halfway through a 5-year transformation under CEO Marcelo Claure, who claimed the top job in August 2014.

Lots has happened — massive layoffs, widespread cost-cutting, a return to subscriber growth, steadied revenues, refilled cash coffers — and much remains to be done.

Sprint’s marketing touts the wireless network’s improvement, within 1 percent of Verizon for reliability. But Sprint has been investing less in its network than analyst Jeffrey Kvaal at Nomura says its needs just to keep up quality and handle new subscribers.

“Sprint can afford to spend more,” Kvaal wrote in a November report.

The company’s reply has been that network advances don’t rely on the traditional big-dollar investments of the past. Its path forward relies on high-tech solutions and low-cost steps to deploy the big swath of untapped capacity that has been sitting idle for years.

Subscriber gains have returned, and they’ve come among high value customers. But Sprint is rapidly shedding lower-revenue pay-as-you-go prepaid customers. Management is promising a relaunch of the prepaid Virgin Mobile brand, which is now a separate business in its own offices in downtown Kansas City.

The new year also brings a new challenge to hang on to existing customers, specifically those who switched from other carriers under Sprint’s half-off rate plan promotions. The first wave of half-off deals are expiring, and Sprint needs to convince many of those customers to start paying full price, move to the Sprint Freedom Unlimited plan or find another way to stick around.

Analyst Walter Piecyk of BTIG Research recently lowered his expectations for Sprint’s net gains of phone customers in part because of those expiring half-off deals.

Markets already seem to be placing bets on whether Sprint and T-Mobile US attempt some sort of merger this year. It would require a change in regulatory thinking, which is why investors took note when President-elect Donald Trump met with Sprint chairman Masayoshi Son, whose Tokyo-based SoftBank Group Corp. is Sprint’s parent company.

Analyst Craig Moffett argues that workable terms for a merger involve some particularly challenging math and that regulatory approval, while more likely than before, remains highly uncertain.

Unfamiliar ground

The calendar turns with an unfamiliar weight on Cerner shareholders. The 2016 drop marked the stock’s second down year in a row, coming on top of a 6.9 percent drop in 2015.

Here’s another unfamiliar feeling: Cerner shares fell during 2016 even as the stock market jumped to record highs.

“There’s a lot going on here, otherwise the stock wouldn’t be performing the way it is,” said analyst David Grossman of Stifel Nicolaus & Co.

Grossman notes that Cerner’s revenues have gotten “more lumpy” and harder to predict and that management’s estimates of growth also have been off. Financial markets want to see Cerner’s growth pace settle to a sustainable pace from its high-growth past.

The North Kansas City-based purveyor of electronic health records to hospitals, clinics and doctors continues to grow. But that business has gotten mature, which means it alone won’t support strong growth at Cerner.

How fast the company grows now, Grossman said, will depend increasingly on gaining business at rivals’ expense, replacing older records systems and selling ancillary products such as its outsourcing services and population health efforts to improve health care outcomes using big data.

Yes, Cerner is seeking a new level, but it is still a growth stock.

Political trade

Shares of Kansas City Southern posted a 13.63 percent gain for the year, but it had been higher ahead of the Nov. 8 elections. Investors saw their shares drop more than $10 the day after Donald Trump’s victory.

“They’re suffering from the headline risk associated with Trump’s election and the uncertainty of what it all means,” said Jon Braatz, an analyst at Kansas City Capital Associates.

Trump has talked about trade tariffs with Mexico and changing the North American Free Trade Agreement. Kansas City Southern hauls a lot of goods each direction across the U.S.-Mexico border.

Kansas City Southern shares have recovered some of that lost ground and managed to keep just ahead of the Dow Jones industrial average for the year. Braatz said investors could see shares regain the lost $10 quickly if Trump’s talk turns into little action.

Here’s how the company’s chief financial officer addressed the NAFTA debate.

During an industry conference on Dec. 1, the railway’s Mike Upchurch recited quotes about the trade agreement. NAFTA was “devastating,” “a big mistake,” “and we should use the hammer of a potential opt-out as leverage to ensure that we get changes that are enforced.”

His point: President Barack Obama said that in 2008, not Donald Trump in 2016.

“Changes to NAFTA have been a topic of discussion for years,” Upchurch said.

Mixed trends

The new year presents a big test, too, for Kansas City-based H&R Block. Its 30.98 percent decline landed it among the 25 worst-performing stocks among the Standard & Poor’s 500 index for 2016, according to Seeking Alpha.

The tax preparation company has vowed an aggressive push for business in the current tax season. Its goal is to arrest the loss in clients it has suffered.

Ironically, Block shares have climbed since Trump’s election. Analyst Mark Palmer at BTIG Research reminded clients in late November that Trump has said that “it would be a dream of mine to put H&R Block right out of business.”

Palmer said tax simplification is a more likely threat, as it could shift more taxpayers to online filing where Block has lagged behind rival Intuit and its TurboTax products.

Banks ranked among local winners in 2016, in part thanks to a December 2015 bump up in interest rates by the Federal Reserve. Another December rate hike this year helped banks earn more on their loans without paying a lot more for deposits.

Beneficiaries include owners of UMB Financial up 65.67 percent, Commerce Bancshares up 42.71 percent and Capitol Federal Financial up 31.05 percent.

The Fed has signaled it could raise rates three times during 2017.

Local investors have one new local stock to consider. Hostess Brands began trading publicly in November, and Wall Street gave the maker of Twinkies the ticker symbol TWNK.

The local list is set to shrink once Lenexa-based Bats Global Markets completes its sale to Chicago-based CBOE Holdings, which is pending regulatory approval. CBOE is paying $3.2 billion for the operator of the nation’s second-largest stock exchange.

This story was originally published December 30, 2016 at 5:55 PM with the headline "Wall Street loved Sprint but not Cerner in 2016’s local stock rankings."