Frontier Bulls: A Splendid Low Cost Technique To Leverage Your Position

Aug.13.12 | About: Frontier Communications (FTR)

This strategy not only provides you with the opportunity to leverage your position in Frontier Communications (NYSE:FTR), but it also provides one with the chance to get into the stock at a much lower price. Only put this strategy to use if you are bullish on the stock as there is a chance that the shares could be put to your account. If you are not bullish on the stock, then it would be in your best interest to look for alternative plays.

Suggested Strategy for Frontier Communications Corporation

The stock finally broke past $4.00, and it did so in a very decisive manner. This former zone of support turned to resistance (May 2012 when it closed below $4.00) has now moved from resistance back to providing support. The normal course of action is for the stock to re test this zone of support before breaking out. Thus, there is a good chance that it could test the 4.00 ranges again before trending higher. A weekly close above 5.10 would be very bullish and could push the stock to the 6.00-6.40 ranges. If this occurs consider closing the position out and banking the profits.

Click to enlarge

This play has two parts to it. The first part entails selling a put and in the second part calls are purchased with the proceeds from part 1.

Part 1

Click to enlarge

The Jan 2013 4.50 puts are trading in the 0.50-$0.55 ranges. If the stock pulls back to the suggested ranges the puts should trade in the 0.70-0.80 ranges. We selected these puts instead of the 4.00 puts because based on the pattern if the stock pulls back to the stated ranges it is not expected to trade below 4.50 for long. For this example, we will assume that the puts can be sold at $0.70. For each contract sold $70 will be deposited into your account. The proceeds from the sales of the puts will be used to complete the second part of the trade.

Part 2

Click to enlarge

The November 2012, 5 calls are trading in the $0.15-$0.20 ranges. If the stock pulls back to the suggested ranges these calls could trade well below 10 cents. For this example, however we will assume that each call is purchased for 10 cents. For each put sold, you will be able to purchase up to 7 calls. If you are looking for even more leverage you could go after the Oct 6.00 calls which you might be able to pick up for a few pennies if the stock pullback to the suggested ranges.

Click to enlarge

Benefits of this strategy

You have an opportunity to significantly leverage your position in this stock for a relatively low cost. You would only need to put up $450 to secure the put, but you would be in a position to control 700 shares. If you had to purchase 700 shares at the current price you would have to put up roughly $3,300.

If the stock trades below the strike price you sold the puts at, the shares could be assigned to your account (assignment usually occurs on the last trading day of the option). Depending on the number of calls you purchased you cost per share could range from $3.90 (if you purchased one call only) to $4.50 (if you purchased 7 calls). If you are bullish on the stock then you are not going to fret about the possibility of having the shares assigned to your account as this strategy provides you with the chance to get into the stock at a lower price.

Risk Factors

The only real risk is that you have a change of heart and are no longer bullish on the prospects of the stock or feel that the stock could trade well below the strike price you sold the puts at. In this case, you could roll the put. Buy back the old puts and sell new out of the money puts.

Company: Frontier Communications

Click to enlarge

Basic overview

  1. Levered Free Cash Flow = $571 million
  2. Quarterly revenue growth = -4%
  3. 52 week change = -32%
  4. Beta = 0.69
  5. Short percentage of float = 22.9%
  6. Sales vs 1 year ago = 38%
  7. Sales vs quarter 1 year ago = - 4.8%
  8. EPS 5 year growth rate = - 28.1
  9. Long term debt to equity = 1.78

Growth

Click to enlarge

  1. Net Income ($mil) 12/2011 = 150
  2. Net Income ($mil) 12/2010 = 153
  3. Net Income ($mil) 12/2009 = 121
  4. EBITDA ($mil) 12/2011 = 2314
  5. EBITDA ($mil) 12/2010 = 1686
  6. EBITDA ($mil) 12/2009 = 1048
  7. Cash Flow ($/share) 12/2011 = 1.65
  8. Cash Flow ($/share) 12/2010 = 1.14
  9. Cash Flow ($/share) 12/2009 = 2.08
  10. Sales ($mil) 12/2011 = 5243
  11. Sales ($mil) 12/2010 = 3798
  12. Sales ($mil) 12/2009 = 2118
  13. Annual EPS before NRI 12/2009 = 0.55
  14. Annual EPS before NRI 12/2010 = 0.37
  15. Annual EPS before NRI 12/2011 = 0.24

Click to enlarge

Dividend history

  1. Dividend Yield = 8.8
  2. Dividend Yield 5 Year Average = 10.8
  3. Dividend 5 year Growth = - 7.00

Dividend sustainability

  1. Payout Ratio 5 Year Average 12/2011 = 1.89

Performance

Click to enlarge

  1. 5 Year History EPS Growth = -19.84
  2. ROE 5 Year Average = 21.81
  3. Current Ratio = 0.8
  4. Current Ratio 5 Year Average = 1.3
  5. Quick Ratio = 0.6
  6. Interest Coverage Quarterly = 1.3

Interesting companies

For investors looking for other ideas detailed data has been provided on one additional company. This article could also prove to be a source of some new ideas A Closer Look At Duke Energy.

Company: CenturyLink Inc (NYSE:CTL)

Basic overview

1. Sales vs 1 year ago = 118%

2. Levered Free Cash Flow = $1.62 billion

3. Beta = 0.61

4. Quarterly revenue growth rate = 4.7%

5. Quarterly earnings growth rate = - 35%

6. 5 year sales growth rate = 48.3%

7. EPS 5 year growth rate = -21%

8. 5 year capital spending rate = 49.5%

9. Long term debt to equity = 0.97

10. Gross margin = 58%

Growth

  1. Net Income ($mil) 12/2011 = 573
  2. Net Income ($mil) 12/2010 = 948
  3. Net Income ($mil) 12/2009 = 647
  4. EBITDA ($mil) 12/2011 = 6046
  5. EBITDA ($mil) 12/2010 = 3509
  6. EBITDA ($mil) 12/2009 = 2155
  7. Cash Flow ($/share) 12/2011 = 8.43
  8. Cash Flow ($/share) 12/2010 = 8.12
  9. Cash Flow ($/share) 12/2009 = 5.7
  10. Sales ($mil) 12/2011 = 15351
  11. Sales ($mil) 12/2010 = 7042
  12. Sales ($mil) 12/2009 = 4974
  13. Annual EPS before NRI 12/2007 = 3.16
  14. Annual EPS before NRI 12/2008 = 3.37
  15. Annual EPS before NRI 12/2009 = 3.6
  16. Annual EPS before NRI 12/2010 = 3.39
  17. Annual EPS before NRI 12/2011 = 2.21

Click to enlarge

Dividend history

  1. Dividend Yield = 6.90
  2. Dividend Yield 5 Year Average = 6.50
  3. Dividend 5 year Growth = 66%

Dividend sustainability

  1. Payout Ratio = 3.33
  2. Payout Ratio 5 Year Average = 0.68

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 4.09
  2. ROE 5 Year Average = 10.29
  3. Return on Investment = 3.26
  4. Debt/Total Cap 5 Year Average = 46.13
  5. Current Ratio = 0.90
  6. Current Ratio 5 Year Average = 0.76
  7. Quick Ratio = 0.60
  8. Cash Ratio = 0.38
  9. Interest Coverage = 1.70

Conclusion

While the trend is still up the markets are in a volatile phase. Consider closing half the position out if the calls are showing gains in the 60%-100% ranges. Alternatively, you can sell half if and when the stock trades to 5.50 ranges and sell the other half if it trades to the 6.00-6.40 ranges. Only individuals willing to take on some risk should consider this play.

EPS, company vs. industry and Price vs industry charts obtained from zacks.com. A major portion of the historical/research data used in this article was obtained from zacks.com. Options tables sourced from yahoofinance.com. Option Profit loss graph sourced from poweropt.com. Earnings vs expectations data sourced from smartmoney.com.

Disclaimer

It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.