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Frontier Communications (NASDAQ:FTR) is a communication provider serving customers in the United States. The company has a market capitalization of $3.92 billion.

FTR is pretty much known in the investment community, not particularly for its business success or savvy business acquisitions, but because the company offers investors a very high dividend yield of 10.2% - which is unmatched in the US telecom service industry. The company is pretty highly leveraged with total debt of $8.3 billion and a leverage ratio of 1.89. This is an important point to note: the existence of considerable debt in the capital structure gives the company an incentive to divert free cash flow from shareholders to appease bond holders and, hence, might reduce its dividend. The entire thesis, which bull investors follow, falls with dividend coverage. As long as management is willing to pay out enormous sums for dividends, bulls will continue to blow the horn for FTR. Given the company has twice its market cap in debt and at the same time pays 10% in dividends, does not strike me to be a sustainable solution to investor concerns about the dividend. In addition, debt was slightly increased in Q2, which brings total outstanding debt up even higher than the mentioned $8.3 billion (plus the associated interest payments). The notion, that maturities have been pushed ahead and financial flexibility has been increased, is not convincing to me as long as the debt burden is not relieved and the top line continues to decline (minus 6% quarter to quarter).

The operating metrics are not convincing as well: The return on equity stands only at 2.50%, the return on investment at 0.82% and the net profit margin at 2.55%. Given these inferior key performance indicators, a multiple of 18x earnings appears way too expensive for a company that has trouble in earning its capital costs.

I have a 2013 EPS of $0.19 on the stock and consider a multiple of 13, based on weak profitability, high debt and declining revenues, appropriate to deviate the intrinsic value of $2.47. With FTR quoting at $3.93 the stock is about 40% overvalued.

FTR entered calendar year 2012 already in a sustained technical down trend. As can be seen in the below chart, the company lost about 50% of its capitalization in early June compared to October last year. Investors caused a spike in volume as they sold off FTR as a consequence of disappointing results. The company has lost about 46% from its 52 week high of $7.87 and quotes at a crucial point now: With a current share price of $3.93 the stock sits right at the upper bound of its short term trend canal. It remains to be seen whether the company can leave the trend canal and move upwards of $4 or falls back down into the trend canal. In the latter case, the stock has a downside potential to its lower trend canal bound of $2.70. Given the stock remains weak at this level, chartists might find a short position with a short-term price target of $2.70 interesting. In case the stock can break its resistance level at $4, the stock may be set for a run-up as momentum builds.

Source: Is Frontier Communications Only Worth $2.50 A Share?