Does Frontier Communications Have Upside Potential?

With shares of Frontier Communications (NYSE:FTR) trading at around $4.12, is FTR an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Many investors were upset about Frontier Communications cutting its dividend. However, the 10 percent yield for Frontier Communications is still higher than most peers, and the dividend cut will save approximately $300 million per year. This money will be used to pay off debt, which, in turn, will lead to decreased interest expenses. This has the potential to be a positive cycle for the company. All that said, do the negatives outweigh the positives for this company? Here are a few of the biggest negatives for Frontier Communications:

  • Low revenue growth expectations
  • Falling business service and data revenue
  • Competition from wireless
  • Increased operating expenses
  • Fitch maintains BB+ rating
  • Disappointing Q4 results
  • Weak stock performance in bull market

These factors should concern most investors. Though it might sound simplistic, the biggest negative is a weak performance in a bull market. This is almost always an indication of either a weak company or a stronger company trapped in a dying industry.

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Let’s take a look at some basic fundamentals for Frontier Communications and how they compare to the fundamentals for CenturyLink (NYSE:CTL) and Windstream Corporation (NASDAQ:WIN). Frontier Communications has a market cap of $4.11 billion, CenturyLink has a market cap of $22.60 billion, and Windstream has a market cap of $4.92 billion.

FTR

CTL

WIN

Trailing   P/E

31.69

28.89

29.64

Forward   P/E

19.62

13.23

16.33

Profit   Margin

2.73%

4.23%

2.73%

ROE

3.57%

3.87%

12.98%

Operating   Cash Flow

 $1.55 Billion

 $6.06 Billion

 $1.78 Billion

Dividend   Yield

10.00%

6.10%

12.60%

Short   Position

N/A

6.40%

12.00%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Frontier Communications is considerably weaker than the industry average of 0.80. Moves are being made that should lead to improvement in this area, but there’s still a long way to go.

Debt-To-Equity

Cash

Long-Term Debt

FTR

2.17

$1.33 Million

$8.94 Billion

CTL

1.07

$211.00 Million

$20.60 Billion

WIN

8.25

$132.00 Million

$9.12 Billion

 

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T = Technicals Are Weak  

The past year hasn’t been bad, especially considering the yield. It’s the performance over the past two years that have shaken investors’ fortitude. Unless there is surprise innovation around the corner, this type of mediocre performance is likely to continue. That said, most investors would be happy with a 5.10 percent one-year gain with a 10 percent yield.

1 Month

Year-To-Date

1 Year

3 Year

FTR

2.88%

-1.45%

5.10%

-26.51%

CTL

4.11%

-6.25%

0.55%

24.28%

WIN

-1.22%

3.55%

-19.34%

-1.69%

 

At $4.12, Frontier Communications is trading below all its averages.

50-Day   SMA

4.19

100-Day   SMA

4.34

200-Day   SMA

4.39

 

E = Earnings Have Been Weakening           

Revenue has been inconsistent on annual basis. Earnings have seen a steady decline over the past several years. If Frontier Communications can’t find a way to cut expenses, then it will eventually cross into the red. The other logical possibility to avoid this scenario would be a significant and sustainable increase in revenue, but that seems highly unlikely at the moment.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

2.24

2.19

3.80

5.24

5.01

Diluted   EPS ($)

0.57

0.38

0.23

0.15

0.13

 

When we look at the last quarter on a year-over-year basis, we see a decrease in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

1.28

1.27

1.26

1.25

1.23

Diluted   EPS ($)

0.05

0.03

0.02

0.07

0.01

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

Decreased demand + increased competition = an unhealthy industry.

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Conclusion

Frontier Communications has good cash flow, which can go a long way, but without innovation, this can only lead to temporary solutions. The 10 percent yield is appealing, but investors should at least consider a more impressive company with a less impressive yield.

Frontier Communications is not a dead company, but it is fighting an uphill battle. Currently, the risks outweigh the rewards. The only reason Frontier Communications earns a neutral WAIT AND SEE rating is because of the impressive yield.

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