This Telecom Is Poised For Solid Growth In 2013

Nov. 5.12 | About: Frontier Communications (FTR)

Frontier (NYSE:FTR) is primarily a rural telecom provider. It provides voice, broadband, satellite video, wireless data access, data security, bundled offerings to households and businesses in 27 states and has approximately 15,400 employees, all based in the U.S. It serves small to medium urban markets and rural areas and offers satellite TV in partnership with Dish Network (NASDAQ:DISH). The stock trades at almost $5 per share. It has a 52 week range of roughly $6 and $3. The price earnings ratio is almost 47. It has earnings per share of $0.10. As an added bonus, at the current price, Frontier's dividend yield is 8.4% - one of the highest yields around. The company has a current ratio of 0.77 which means that it will have to do some work reorganizing its debt load to stay on top of current liabilities, but it is nothing to be overly concerned about.

In 2009, Frontier announced that it acquired approximately 4.8 million access lines from Verizon. This transaction created the largest pure rural communications services provider. At the time of the acquisition Frontier had seven million access lines, 8.6 million voice and broadband connections and 16,000 employees in 27 states. The acquisition allowed Frontier to offer new bundled services and enhanced technologies to customers in a broader geographic area. It currently has approximately 3.5 million residential customers and more than 380,000 business consumers. This acquisition actually had the effect of hurting Frontier's share price in my opinion, as investors reacted negatively to the company's reliance on wireline technology.

Frontier's second quarter 2012 results show $18 million in net income and $0.02 per share. The company increased its broadband reach by more than 60,000 customers - and impressive achievement.

Revenue for the second quarter was $1,258.8 million. This decrease from last quarter is attributed to the diminishing number of residential and business land-line customers, switched access, data services and video. By expanding its broadband customers by 60,000 the company is well on its way towards increased revenue and less reliance on its wireline business. It added 4,400 video customers in the quarter. Integration costs were $35.1 million in the first quarter compared to $42.2 million in the fourth quarter of 2011.

The costs were associated with the successful conversion of nine states into its platform of systems application and ongoing network integration activities. The company expects capital expenditures to be around $725 million to $775 million in 2012 and free cash flow to be in the $900 million to $1 billion. Integration activities will clock in at $40 million.

Frontier completed a 14 state system roll-in to Frontier's legacy systems so that all operating, financial and human resource systems related to the 2010 acquisition of Verizon wire-line exchanges. The conversion has been completed nine months ahead of schedule. The completion of this conversion reduces costs and streamlines operations, provides better customer response times and sets the stage for the quick delivery of new products and services. It is anticipated that this conversion will provide for better customer retention, increased market share and with provide better procedures to get products and services quickly to the customer base.

Frontier Communications pays a dividend of $0.40 with a yield of 8.4%. This makes Frontier one of the more attractive stocks in the market. Frontier needs to make increasing capital investments in broadband, particularly for video transmission, and is in the middle of making this transformation. The company is experiencing weak subscriber growth and declining revenues. It is lowering its rate of revenue decline with the reduction of access line losses, high speed, broadband expansion and new product offerings.

The company is restructuring debt to deal with revenue declines, but its emphasis on growing its broadband customer base will begin to increase revenue. The company faces many competitive threats, and has not been completely successful in integrating the assets purchased in the Verizon acquisition. These factors are going to have a limiting factor on earnings going forward. Frontier's biggest competitor in the diversified services industry is AT&T (NYSE:T). AT&T has a built in advantage with its broadband spectrum, but Frontier has nonetheless been able to grow its base and will continue to do so in the coming year.

In the rural services provider industry, Windstream (NASDAQ:WIN) is its closest and better performing competitor as it has branched into cloud computing and business services which have given it a broader geographic footprint. Verizon (NYSE:VZ) remains a competitor in wireless, broadband and satellite television delivery, but, as was pointed out earlier, is dropping its wireline services and has sold much of it to Frontier. Telephone Data Systems (NYSE:TDS) provides wireless, local and long distance, broadband through U.S. Cellular for wireless and TDS Telecom for wire-line. It operates in 36 states, serving seven million customers, and employs 12,300 people. I do not anticipate TDS being a major hindrance to Frontier's efforts to expand its broadband footprint.

Some good news on the horizon is the prospect for better revenue as the rate of subscriber loss has been curtailed, the cost savings from system conversions and better than expected margins. Negatives are weak business revenue and that revenue performance is coming from non-core related business activity of less bad debt expense and high margin regulatory revenue which will only decrease in the future as those subsidies paid to operators are diminishing as land line service fades into the future. This means that as we go forward Frontier is only going to get stronger.

There has long been talk that all or part of Frontier's business units will be acquired by a competitor with less debt. This may happen, even though as of now no potential buyer has emerged. If one did emerge I expect a nice premium on the current stock price. Regardless, Frontier is trading below value currently. With its healthy dividend yield investors should look hard at this stock. I believe Frontier is poised for very solid growth in 2013.

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.