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Basic overview

Frontier Communications Corporation (NASDAQ:FTR) provides communications services for residential and business customers in the United States. The company offers local and long distance voice services, including basic telephone wireline services to residential and business customers; and packages of communications services. It also provides data and Internet services comprising residential services, such as high-speed Internet, dial up Internet, portal and e-mail products, and hard drive back-up services; commercial services, such as Ethernet, dedicated Internet, multiprotocol label switching, and TDM data transport services; and wireless data services.

While there are reasons to be bullish on FTR; at this stage of the game only individuals willing to take on a bit of extra risk should consider opening up long positions.

Reasons to be bullish on Frontier Communications Corp

A good five-year dividend average of 10.42%

It has a very strong free cash flow of $700 million.

A decent current and quick ratio of 1.07 and 1.07 respectively

An acceptable interest coverage ratio (a higher number would have been better) of 1.4. If this ratio drops to 1 we would start to get concerned.

Sales for the past three years have been increasing; they jumped from $2.1 billion in 2009, to $5.24 billion in 2011.

EBITDA has also been trending upward for the past three years.

On the negative side net income has been trending downward but the cash flow from operating activities has been surging. Cash flow from operating activities has jumped from $742 million in 2009, to $1.58 billion in 2011. The cash flow from operating activities is more than enough to cover the divided payment.

It is moving in the right direction in terms of managing its profitability and cash flow via reducing operating expenses, and management remains committed to generating EBITDA margins of 50% by the end of 2012.

It landed a three year deal with AT&T (NYSE:T) to resell AT&T's wireless voice and data products to its customers. This deal will help fuel subscriber growth and retain old subscribers. It should boost Frontier's position against CenturyLink (NYSE:CTL), which inked a similar deal with Verizon (NYSE:VZ).

Management is expected to ramp up FTR's broadband capability and convert the rural fixed lines it acquired from Verizon to its own systems by the 2nd quarter of 2012. Management expects these conversions to boost earnings and provide savings of $600 million through synergies by the end of 2012.

The rural fixed lines it acquired from Verizon after conversion will boost the deployment of broadband services to hospitals, government buildings, libraries, etc. in under served or non served communities. FTR is planning on deploying high-speed internet with speeds of at least 3 Mbps in over 85% of the households by the end of 2013. It plans to increase the speed to 4Mbps by 2015. This expansion will lead to an increase in revenue going forward.

FTR has good free cash flow yield of over 16% and a revenue growth of roughly 21%

Industry

It has a free cash flow rate of $701.40M and a current ratio of 1.07 and an interest coverage ratio of 1.4

Performance

Qtrly Earnings Growth = -8.1%

Qtrly Revenue Growth = -5.6%

Total return for the past 3 years = -1.46%

Total return for the past 5 years = -39.61%

Total return for the past 12 months = -37.78%

Consecutive dividend increases = 0 years

Growth

Net income for the past three years

Net Income - 2011 = $121 million

Net Income - 2010 = $153 million

Net Income - 2009 = $150 million

EBITDA ($mil) 12/2011 = $2314

EBITDA ($mil) 12/2010 = $1686

EBITDA ($mil) 12/2009 = $1048

Sales ($mil) 12/2011 = $5243

Sales ($mil) 12/2010 = $3798

Sales ($mil) 12/2009 = $2118

Dividend Sustainability

Total cash flow from operating activities

2009 = $742.72 million

2010 = $1.23 billion

2011 = $1.58 billion

Payout Ratio 12/2011 = 313%

Payout Ratio 5 Yr Avg 12/2011 = 186%

Change in Payout Ratio = 126%

Other Key Important Ratios

Price to Sales = 0.88

Price to Book = 1.03

Price to Tangible Book = -1.19

Price to Cash Flow = 2.8

Price to Free Cash Flow = N.A.

Quick Ratio = 1.07

Current Ratio = 1.07

LT Debt to Equity = 1.84

Total Debt to Equity = 1.84

Interest Coverage = 1.4

Inventory Turnover = N/A

Asset Turnover = 0.3

Dividend yield 5-year average = 10.42

Dividend rate = $ 0.40

Dividend growth rate 3-year avg = -8.93%

Dividend growth rate 5-year avg = -7.01

Paying dividends since = 2004

Total return last 3 years = -1.46%

Total return last 5 years = -39.61%

Related companies (Peer group analysis)

Windstream Corp (NASDAQ: WIN)

Industry : Services

It has a free cash flow rate of $245.20M and a current ratio of 1.04 and an interest coverage ratio of 0.83

Net income for the past three years

Net Income - 2011 = $399 million

Net Income - 2010 = $313 million

Net Income - 2009 = $172 million

Total cash flow from operating activities

2008 = $1.09 billion

2009 = $1.13 billion

2010 = $1.1 billion

Dividend yield 5-year average = 8.87

Dividend rate = $ 1.00

Dividend growth rate 3-year avg =

Dividend growth rate 5-year avg = 0

Consecutive dividend increases = 0 years

Paying dividends since = 2005

Total return last 3 years = 106.57%

Total return last 5 years = 15.68%

NTELOS Holdings Corp (NASDAQ:[NTLS)

Industry : Services

It has a free cash flow rate of $43.08M and a current ratio of 1.2 and an interest coverage ratio of 3.71

Net income for the past three years

Net Income - 2011 = $63 million

Net Income - 2010 = $45 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities

2008 = $185.35 million

2009 = $182.61 million

2010 = $159.71 million

Dividend yield 5-year average = 4.71

Dividend rate = $ 1.68

Dividend growth rate 3-year avg = 10.5%

Dividend growth rate 5-year avg = 10.94

Consecutive dividend increases = 0 years

Paying dividends since = 2007

Total return last 3 years = -21.05%

Total return last 5 years = -11.44%

Alaska Communications Systems (NASDAQ: ALSK)

Industry : Services

It has a free cash flow rate of $58.51M and a current ratio of 1.22 and an interest coverage ratio of 1.91

Net income for the past three years

Net Income - 2011 = $34 million

Net Income - 2010 = $-31 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities

2008 = $94.58 million

2009 = $96.68 million

2010 = $86.37 million

Dividend yield 5-year average = 9.01

Dividend rate = $ 0.20

Dividend growth rate 3-year avg = -6.4%

Dividend growth rate 5-year avg = -8

Consecutive dividend increases = 0 years

Paying dividends since = 2004

Total return last 3 years = -13.12%

Total return last 5 years = -50.89%

Consolidated Communications Ho (NASDAQ: CNSL)

Industry : Services

It has a free cash flow rate of $70.81M and a current ratio of 2.02 and an interest coverage ratio of 1.65

Net income for the past three years

Net Income - 2011 = $25 million

Net Income - 2010 = $33 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities

2008 = $92.42 million

2009 = $116.31 million

2010 = $115.02 million

Dividend yield 5-year average = 9.76

Dividend rate = $ 1.55

Dividend growth rate 3-year avg = 0%

Dividend growth rate 5-year avg = 0

Consecutive dividend increases = 0 years

Paying dividends since = 2005

Total return last 3 years = 144.25%

Total return last 5 years = 31.1%

Conclusion

While there are several reasons to be bullish on FTR, there are also many reasons to be negative on it; one such reason is the extremely high payout ratio of 312%; another is its huge debt, etc. Having said that individuals willing to take on a bit of risk could be well rewarded in the future.

Technical outlook

As long as it can remain above $4 on a weekly basis the picture will remain neutral. A weekly close above $5.50 will turn the outlook bullish and should result in a test of the $7.00-$7.20 ranges before it pulls back. A weekly close above $7 on strong volume should result in FTR trading to a series of new 52-week highs.

As the markets are extremely overbought, investors should wait for a strong pullback before committing any fresh money to this market.

Sources: Free cash flow yield, and operating income from continued operations charts sourced from Ycharts. EPS, EPS surprise, broker recommendations and price and consensus charts sourced from zacks.com. Earnings estimates and growth rate charts for FTR sourced from dailyfinance.com. Earnings Vs expectation graphs sourced from smartmoney.com

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: Is Frontier Communications A Long-Term Buy?