Frontier: Profit From This Short Sell Opportunity Now

Sep.12.12 | About: Frontier Communications (FTR)

The market sees Frontier Communications (NASDAQ:FTR) as an appealing short sell. This consensus creates an opportunity for an effective short squeeze as well. In its second quarter earnings release, Frontier reported a declining customer base and decreasing revenues, earnings and cash flows alongside increasing costs from integrating new territories. Frontier expects this trend to continue due to increased competition and ongoing costs as it attempts to consolidate internal operations while meeting penetration and bandwidth quotas under the FCC federal funds stipulations. Current shareholders should consider a short squeeze while hedging interests in other U.S. telecoms that have higher dividends and potential for capital appreciation. Interested investors can consider Frontier as an effective short sell as the third quarter and remainder of 2012 continue to unfold.

Frontier is most comparable to smaller U.S. telecoms like Windstream (NASDAQ:WIN) and CenturyLink (NYSE:CTL) as well as the major telecoms like Verizon (NYSE:VZ) and AT&T (NYSE:T). Frontier's $4.6 billion market cap is the smallest among these telecoms. Windstream is the next largest at around $6 billion, CenturyLink is around $26 billion and AT&T is the largest at around $215 billion. Frontier has the lowest price-to-book ratio of around 1.05. Windstream is the highest at 3.35 and Verizon is the next highest at around 2.1. Windstream's price-to-earnings ratio is around 34, and this is the lowest amongst the telecoms. AT&T and CenturyLink's price is around 49 times earnings, Verizon is around 43.7 times earnings and Frontier is around 42 times earnings. Frontier's $0.40 annualized dividend is the lowest amongst the telecoms and the only one below $1. CenturyLink is the highest at around $2.90.

Frontier also has the lowest EPS of around $0.11, Windstream's around $0.28. Verizon's EPS is the highest at around $1.01. Frontier has the lowest price-to-sales ratio at around 0.89 - both Windstream and CenturyLink are around 1.1 while AT&T is around 1.7. Frontier's 20.9% 5 year sales growth is the second highest behind Verizon's 44.3%. At around 4.8%, Frontier has the only sales deficit in the past quarter, YOY. Frontier's current ratio is around 0.84 while it has the second highest debt-to-equity ratio of around1.92. Windstream has the highest at around 6.62, while AT&T's 0.62 is the lowest. Frontier has the lowest return on equity and net margin of around 2.25% and 2.35%, respectively. Frontier's 90.7% gross margin and 16.12% operating margin are the highest among the telecoms.

Frontier's beta score is around 0.7, the second highest behind Windstream's 0.85. Frontier's average daily volume is around 10.6 million, this is higher than CenturyLink's 5.6 million and Windstream's 8.4 million. Frontier's short interest ratio ranges between 10 and 20 - this is by far the highest amongst the telecoms. Windstream is the second highest ranging from 5 to 6. Frontier also has the highest number and highest percentage of shares outstanding at around 23%, Windstream is the second closest at around 10%. Windstream's stock is trading at an 8% deficit YTD through September, while Frontier's at a 5% deficit. But the stock has increased by around 9.9% since its last earnings release.

Frontier's recent earnings release details declining metrics across the board due to increased competition and integration costs. Second quarter revenue decreased 5%, YOY down to $1.26 billion. Revenue declined due to declining numbers in residential and business customers, data services, video revenue and switched access revenue as well. Frontier expects this to continue through the end of 2012. Frontier lost over 92,000 access lines in the second quarter and over 102,000 in the first quarter due to the combination of increased competition, economic conditions and the loss of second lines due to broadband service installations.

Frontier's number of access lines decreased 8% on an annual basis compared to 9% through the first half of 2011. Since the first half of 2011, there has been an 8% decrease in residential customers and a 9% decrease in business customers. Frontier's average monthly total revenue per access line increased by 3%, YOY, average customer monthly revenue per access line increased 4%. Total customer revenue declined by 5% YOY, but market penetration did increased the average monthly revenue per residential customer by 1% and per business customer by 8%. Frontier added 5,400 broadband customers in the second quarter, bringing the total to 17,000 for the first half of 2012.

Broadband subscribers increased by 2% while the number of video subscribers increased by 3%. Local and long distance revenue decreased by 9%, YOY, switched access revenue decreased by 7% in the second quarter. Integration costs of the assets acquired from Verizon increased 41%, YOY to $28 million in the second quarter and 90%, YOY to $63 million for the first half of 2012. Second quarter net income decreased to $21 million from $30 million in the first quarter and $33 million, YOY. Net income in the first half of 2012 decreased to $52 million form $90 million, YOY. Frontier's dividend is around 37% of its free cash flow while its operating cash flow margin is around 49.3%.

Frontier's currently opening a retail location in Elk Grove, California and recently expanded service into Alpine County, California and Topaz Lake and Douglas County, Nevada in late July behind the FCC's Connect America Fund. This brings Frontier 623 new households from Alpine, 423 from Topaz and over 5,700 from Douglas County. Under FCC regulations, Frontier needs to bring 85% of these types of acquisitions from federal funds up to minimum download speeds of 3 Mpbs before 2014 and 4 Mbps by 2016. Frontier has 79% at 3 Mbps and 69% at 4 Mbps at the end of the first half 2012. Frontier recently increased speeds for its customers in Appalachian Ohio.

Total capital expenditures for 2012 may go up to $775 million while final integration expenses for 2012 will total $40 million. Frontier has principal payments of $65 million due in 2012, $581 million in 2013 and $258 million in 2014. Frontier has substantial liquidity between its cash and credit facility, but, it will need to sustain growth and lower its leverage ratio after integration is completed in order to maintain its BB+ credit rating.

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.