In this article, let's take a look at Frontier Communications Corporation (FTR, Financial), a $6.56 billion market cap company, which provides wireline telecom services, including voice, data and video, to over 3 million customers in rural areas and small and medium-sized U.S. cities.
Cash Flow Generation
Frontier offers voice, data, and television services and products, some of them available alone and others as packaged solutions. The company focuses on its operating performance. Special attention was required in the Internet access business, but with good results.
Moreover, generating cash flow is a premise, but we don’t see many advances in its financial position. Frontier must invest heavily in its networks in order to compete with its rivals.
Verizon´s Deal
At mid-2010, the firm purchased a large number of wireline properties from Verizon Communications (VZ) with stock and debt. After this, the annual dividend was cut from $1.00 to $0.75, and then to $0.40 in February 2012 to focus on reducing debt leverage. Despite this, the dividend yield is 6.2% which is attractive for dividend investors. In a next article, we can calculate the intrinsic value from these dividends cash flows.
Other Deal
Recently, it was closed the announced agreement to purchase wireline assets in Connecticut from AT&T (T). We think this is positive for the future of the firm.
Revenues, Margins and Profitability
Looking at profitability, revenues declined by 3.75% and earnings per share remained flat in the most recent quarter compared to the same quarter a year ago ($0.04 vs $0.04). During the past fiscal year, the company reported lower earnings of $0.12 versus $0.14 in the previous year. This year, Wall Street expects an improvement in earnings ($0.20 versus $0.12).
The gross profit margin is considered rather high, is at 43.79%, but it has decreased from the same period last year. The net margin is at 4.64% and is ranked higher than 78% of the 944 Companies in the Telecom Services industry.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| FTR | Frontier Communications | 4.72 |
| KT | KT Corporation | -1.78 |
| VIV | Telefonica Brasil SA | 9.73 |
| WIN | Windstream Holdings, Inc. | 22.56 |
| CHA | China Telecom Corp Ltd | 5.67 |
| Ă‚ | Industry Median | 12.35 |
The company has a current ROE of 4.72% which is lower than the industry median and Telefonica Brasil (VIV, Financial) and China Telecom (CHA, Financial); but higher than the one exhibit by KT Corporation (KT, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Windstream Holdings (WIN, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 34.8x, trading at a premium compared to an average of 22.3x for the industry. To use another metric, its price-to-book ratio of 1.69x indicates a discount versus the industry average of 2.84x while the price-to-sales ratio of 1.41x is below the industry average of 1.71x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $13.294, which represents a 5.9% compound annual growth rate (CAGR).
The share price has jumped by 44.37%, exceeding the S&P 500 index.
Final Comment
The Verizon's acquisition made the firm tripled in size. Also, it benefitted from expanding Internet access availability and speeds. Further, we saw that it agreed to acquire AT&T's operations in Connecticut which we believe should boost business.
According to the relative valuation, the stock is trading higher and as a result, it is difficult to identify if there exists an adequate margin of safety to buy the stock.
Hedge fund guru Paul Tudor Jones (Trades, Portfolio) added this stock to his portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
