Frontier Communications (NYSE:FTR) is an attractive asset for investors primarily interested in high dividend yields, short-term trading and low-priced stocks. Frontier Communications services a limited market and is faced with heavy competition in some of its more promising sectors of growth.
Investors and shareholders interested in this stock should watch it closely for the most advantageous entry and exit points. The degree of long-term viability and success Frontier Communications will have in the future is certainly questionable. There are positive signs of growth and potential in Frontier Communications for short-term gains as well as obstacles on the horizon which may create doubt or misgivings for the conservative investors.
Frontier's stock price has been decreasing steadily for some time now. The stock price is down 33% year-to-date and down 20% within the past 12 weeks. Sales growth is down nearly 6% from last year but down only 1% from last quarter. Return on equity increased by more than 0.5% over the past three quarters. Net margin has been decreasing marginally by less than 1% over the last three quarters. Operating margin has been relatively stable at over 4% for the last three quarters. The dividend yield is above the industry average, while the return on equity is below the industry average. Frontier's net profit margin is right on par with the industry average. Frontier is going through a transitioning period at this point as it absorbs and integrates assets to increase the size of its current line market.
Like most stocks, Frontier is a mixed bag of goods. Investors and shareholders can reasonably decide to be bearish or bullish, seeing the glass as half empty or half full in terms of Frontiers future outlook. There are valid reasons to be bullish on the recent successes Frontier has had with its transition period integrating Verizon's (NYSE:VZ) assets into its operations. There are also valid reasons to be bearish on Frontier's long-term viability. Some of the bullish signs from Frontier, include sales increasing from $2.1 billion to over $5.2 billion from 2009 to 2011. Frontier has levered free cash flow of over $550 million while it has a cash flow yield of 17%. There has also been significant activity of insider purchases in the month of May. These are positive signs for investors interested in short-term trades as Frontier has made recent announcements that should help increase the stock price.
Frontier Communications recently announced a launch of VoIP business services for the greater Seattle area. These services include SIP trunking and IP telephony over Frontier private network opposed to the public internet. This service will allow local businesses to save money on equipment and initial investments without having to be concerned with purchasing PBX systems. Frontier will provide customer service and monitoring for clients on the network. This announcement is representative of Frontier primary agendas to retain its base through attentive customer service while focusing on innovating in its local markets.
Frontier also recently announced the continuation of its partnership with The Berry Company to offer the Frontier Pages at 142 of its local markets through 2014. The print and digital versions of the Yellow Pages will continue to help small and mid-sized businesses with advertising by providing a variety of online marketing services from The Berry Company. Over 35,000 businesses can benefit from Berry's account managers helping with websites, mobile solutions, SEO and SEM services as well as video advertising. Continuing the partnership with the "local leads agency" will help offset the expense of integrating the rest of Frontier's recently acquired assets for the next two years.
As of 2012, Frontier operated in 27 states with 1.8 million broadband connections and 5.3 access lines. CenturyLink (NYSE:CTL) is a similar competitor with a more developed and expansive asset portfolio, domestically and internationally as well. Over the next few years, Frontier's net income and expenses will benefit as the assets from Verizon come to fruition throughout the next few years. Frontier currently has a debt ratio lower than the industry average by more than 20%. Competition with other broadband services and decreased demand for landlines will hamper the size of its customer base and revenues going forward. Revenues increased by over 240% from 2009 to 2011. Multiple competitors across its products lines and services may compel Frontier to lower its subscription prices, affecting earnings as well.
Acquiring the rural telecom services from Verizon will increase the more immediate earnings. However, across the nation the number people using landlines is decreasing while the number of the industry's mobile customers continues to increase. Frontier plans to increase margins with improved bundles to telephone customers, however, numbers in this market sector continue to decrease.
Frontier also intends to increase its share of the broadband market in its territories competing with cable companies including Time Warner Cable (TWC) and Comcast (NASDAQ:CMCSA). Frontier believes flexible systems and exceptional customer service will be the differentiating factor. This is a potential price war that Frontier would immediately lose to those large cable companies with $24 million and $80 million market caps, respectively.
Frontier has an unfavorable book value of -$3.8 billion and an intangible asset ratio of 47%. This is due to the inflated goodwill from the price of the acquisition outweighing the net assets. The long-term outlook will be troublesome if the recently acquired assets don't have a significant impact on Frontier's future wealth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.