- Frontier Communications completed a reverse split on Monday.
- The stock has been absolutely beat up due to this move and a dividend cut.
- The market needs to focus back on cash flows.
Back in May, my thought was that Frontier Communications (FTR) was attractively priced below $1.50. My major concern in owning the telecom stock was a lingering shakeout from the dividend cut and reverse split that has the stock hitting new lows now.
The stock fell further following a presentation at the Sohn Conference that called Frontier a good short. The question is whether the reverse split on July 10 was the move that will finally create a bottom in Frontier.
He made the suggestion that Frontier is going bankrupt based on the step to cut the dividend. As mentioned in my last research article, hedge funds and algorithm trading use dividend cuts to press shorts no matter the logic in the move.
Effective Monday, Frontier completed the 1-for-15 reverse stock split. The stock initially traded around $15 or the equivalent of $1 before the split. The stock has now crossed below $15 with another large 7% loss typical of the normal negativity surrounding a reverse split. For most situations, such a split allows more shorts.
Back in May, the company cut the dividend by 62% while maintaining the forecast for 2017 free cash flows of $800 million to $1,000 million. Frontier made the cut to save cash to pay down debt which would reduce the bankruptcy risk suggested by the price collapse.
Considering the telecom didn't cut the cash flow forecasts, one can track a large portion of the declines since May 2 on the capital actions. The stock has fared far worse than CenturyLink (CTL) and Windstream (WIN) during the last few months. Frontier is down over 50%.FTR data by YCharts
Naturally, the company wouldn't cut the dividend if business was rosy and growing. Fellow contributor Blue Harbinger highlighted how investors had high confidence in near-term bonds. The issue was longer-term bonds dated after 2020 that the company recently made a move to resolve with a $1.15 billion tender offer that in essence rolls over 2020 debt to 2024 for a lower rate.
Frontier has a goal of reducing the leverage ratio from 4.39x to 3.5x by year-end 2021. Based on the current maturities, the biggest issue didn't start occurring until 2020 and the recent tender offer solves a lot of that issue.
The market though seems confused. Frontier had free cash flow over the TTM of over $900 million. If the company applied these funds to paying down debt, does the telecom even have a problem?
The key investor takeaway is that the market has absolutely overblown the recent capital actions. Frontier now offers an incredible 17% dividend and is making some solid moves to cut leverage ratios. The stock is interesting below $15.
This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FTR over 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.
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