Thesis
Several months ago, rural telecommuncations company Frontier Communications (FTR) made headlines with a $5 billion buyout of a large portion of Verizon Communications’ (VZ) landlines throughout the country. The deal tripled the size of Frontier and made it the largest landline operator in the country. Since the deal was announced, however, the company has seen relatively stagnant growth in its share price despite a heavy influx in revenue.
The company at its current valuation is undervalued by a significant amount. The company is in the landline industry, which is not a growing industry. Yet, the landline is still very important to businesses, homes, and rural areas. The landline industry is continuing to lose its market share to wireless, and there is a significant shift for homes to have only wireless service. Therefore, the pie is shrinking in which Frontier operates, but the company does have the largest pie.
The company, over the next couple years, should see its operating income grow as it incorporates and expands based on the Verizon acquisition. However, the company is losing more subscribers than they are gaining, which does cause one to become quite cautious of the company. On a five year outlook, landlines will still be an important industry that will not lose such significant subscribership that companies will become obsolete.
One of the best aspects of Frontier Communications is that it operates in the rural side of the industry. While wireless companies continue to move into these areas, there is much less drop off in landlines in the rural populations than in urban ones. Still, in its last quarter the company saw its losses quadruple its new subscribers. The company has been able to help itself by lowering costs, and it has increased its operating margins. Additionally, the company will significantly increase its earnings with the addition of Verizon’s lines. This addition will allow for the company to increase its book value, P/E value, and challenge its current price levels.
Additionally, the company offers a very significant dividend with a yield over 9%. The company’s yield is the highest on the S&P 500. It is currently $0.75 per share, which was recently cut from $1.00. The high yield has been criticized by many, andanalysts believe that it cannot last since the dividend per share is higher than the earnings per share. Yet, the company is still offering a significant yield. Even a decrease would still mean a…
