Is Frontier The Right Stock For Your Portfolio?

Aug.30.12 | About: Frontier Communications (FTR)

Edited by Kate Boehme

Frontier Communications (NYSE:FTR) is carrying on its steady rise. The stock has gained almost 20 percent since I suggested that the stock is primed for a rebound. It was not an easy task for the company to triple the size of operations and keep it clear of hitches. 2011 was a year of transformation for Frontier; it was the first full year for the company after it acquired the Verizon (NYSE:VZ) properties.

More recently, Frontier has been focused on increasing its commercial business, as it is believed that the commercial sales department holds big opportunities. Frontier is using its direct sales teams to broaden its reach, to encompass more markets and to gather more customers. As a result, Frontier has been able to decrease its quarterly customer losses. In my last article, which discussed Frontier dividend safety issues, I touched on the company's revenue and customer losses. The company has been able to reduce line losses by a full percentage point, from nine percent to eight percent.

Current Business Prospects

At present, wireless is one of the telecom industry's most important segments. Frontier has realized this, and has come to increase the focus on wireless business accordingly. A total of 25 Frontier markets currently have a community Wi-Fi mesh network; the company plans to add a further two markets to the network by the end of the year. Frontier Wi-Fi services are offered in the same manner as internet hot spots. Frontier customers can avail use these services for free, but other customers have to pay for a specific period of time. All smart devices work on Wi-Fi, which gives customers more data capacity than is available on existing cellular networks. Also, as video streaming grows and online applications expand, Frontier home and small business networks will serve as "offload outlets" for cellular congestion. New smart device applications will automatically search for a Wi-Fi signal and connect devices seamlessly to that network. The company expects wireless traffic to grow and, as it does, Frontier will be the key provider for wireless data-intensive applications.

At the time that the Verizon assets were acquired, Frontier also assumed about four million access lines and about $3.5 billion in debt. As a result of the transaction, FTR became the nation's largest communications services provider focused on small and medium-sized towns and cities and rural areas, operating in 27 states. Acquisition of the Verizon assets enabled the company to achieve cost synergies; the company has been able to significantly reduce its costs and expenses due to the integration.

Debt Issue

Verizon assets contributed significantly toward the debt of the company, and the debt figures almost doubled. Frontier has been fighting these massive debt levels and currently the debt metrics are pretty poor, when compared to the industry average. However, I believe that Frontier took a very positive step to reduce dividends and direct cash flows toward debt reduction. Overall, Frontier has prudent financial management policies in place, and I believe the company will be able to better its current position in the near future. Below I have developed some metrics to analyze the company's debt and cash flow positions.

Free Cash Flows

 

Free Cash Flows

 
 

2011

2010

2009

Net Income

$157,608

$155,717

$123,181

Depreciation

$881,484

$599,662

$362,228

Other noncash items

$521,694

$294,057

$114,163

Funds from Operations (FFO)

$1,560,786

$1,049,436

$599,572

change in noncash current assets

$225,698

$180,256

$75,697

change in noncash current liabilities

$220,569

$155,698

$356,871

Operating Cash flows

$1,114,519

$713,482

$167,004

Capital Expenditures

$824,839

$577,879

$255,965

Free Operating Cash Flow

$289,680

$135,603

-$88,961

       

Long Term Debt

$8,205,841

$7,983,614

$4,794,129

Click to enlarge

All the data is taken from SEC filings

The table shows the cash flows position of the company. I have taken the three most recent years for analysis, and all the data is taken from the Frontier's SEC filings. It is evident from the table that the company is significantly improving its cash flows position. Free operating cash flow reversed its negative trend and keeps going up since 2009. I expect Frontier to post even better free cash flow results with improving revenues, cost synergies and reduced dividend payments. Frontier expects to achieve $650 million worth of cost synergies in different sectors of the business.

Metrics

 

Essential Ratios

 
 

2011

2010

2009

Funds from Operations(FFO)/Total Debt

0.19

0.13

0.13

FFO/Capital spending requirements

1.89

1.82

2.34

Free Operating Cash Flow + interest expense/ Interest expense

1.44

1.26

0.76

Debt Service coverage

1.26

0.82

0.75

Click to enlarge

I have used four ratios to assess the debt position and the servicing ability of the company. All of the ratios point to an improving debt situation. Recently, the company raised money through dividend cuts and a new bond issue to pay the even costlier issues with more imminent due dates. For the current year, I anticipate that Frontier will exhibit even more positive debt metrics with even better financial results.

Summary

Rating agencies gave BB/Ba2 ratings to the most recent debt issue by Frontier Communications. I believe the company has impressive financial controls in place, and its willingness to decrease dividends shows a clear commitment from management. Reducing dividends would have been a hard move for management to accept, and yet they did so. These brave and prudent decisions will work in the company's favor over the long-term. Most importantly, such efforts will ensure that Frontier is able to manage its debt. With such a fantastic combination of prudent financial controls and solid business potential, I expect Frontier to continue its rise to the top.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.