Frontier: The Best Of The Lot With Significant Price Appreciation Potential

Frontier Communications Corporation (FTR) provides voice, high speed internet and digital TV services across 27 states in the U.S. I continue to remain bullish on the company as it has managed to improve its revenue trends. I also believe that the company is trading at cheaper valuations. Furthermore, FTR offers a striking dividend yield with relatively lower payout ratio.

The recent third quarter's results paint an encouraging outlook for the company's future. Revenue trends have been stabilizing as residential revenues experienced a modest growth of 0.1% QoQ, whereas business revenues were only down by 0.4% QoQ. The better performance was primarily driven by the growth in data revenue. The company added around 27,000 broadband customers due to competitive pricing and attractive bundled offerings. The losses in both residential and business customers continued to decline for the last five quarters. Along with the encouraging customer trends, average revenue per customer (OTCPK:ARPC) is also on the rise. ARPC improved by 1.4% YoY and 1% YoY, both in residential and business customers, respectively. The company can increase its voice revenues by growing its market share in Verizon legacy territories.

Dividends

In the last five years, the company has cut down on its dividends from $0.25 per share to $0.10 per share as consumers move from traditional voice to data services. But I believe the company still offers a healthy dividend yield of 8.50% and most importantly it has managed to maintain a decent payout ratio of 43.2% in the previous quarter. The payout ratio was slightly suppressed due to the lower cash taxes in the quarter, but even if we remove that cushion, the payout ratio will rise to 50%, which is also quite manageable. This means that FTR could continue with its dividends keeping ample cash for other purposes.

Key takeaways of Leveraged Finance Conference

FTR presented at the Leveraged Finance Conference Bank of America Merrill Lynch on December 13, 2013. Management has made it clear that their focus in not only on maintaining an attractive dividends but they are also keen to invest in their network and to bring leverage (net debt/adjusted EBITDA) down to the long term target of 2.50x. Robert W. Starr - the Senior Vice President and Treasurer - is reported to have said in the conference, "The focus has been on paying down debt. So residual free cash flow after investing in our infrastructure and then paying out that dividend has been dedicated towards reducing leverage."

The management is trying to keep things simple. The company has enough cash to cover its short term liabilities. Furthermore, it is committed to using residual cash to pay off the debt, which could be made much easier in the current scenario of rising interest rates. FTR has also made it clear that it is open to launching new products and services to keep up with its competitors. Also, the company is open to future acquisitions at reasonable prices to enhance its growth opportunities. It is also eager to unlock organic growth opportunities by offering higher broadband speeds, reducing wireless backhaul, competitive pricing and bundled products and frontier secure products.

Valuation

P/E Multiple

Average P/E of FTR	FTR- Estimated 2014 EPS	Price Target (Average P/E *estimated 2014 EPS)
18.7x	Bull case=0.33	$6.17
18.7x	Bearish case=0.19	$3.55

Source: Yahoo Finance

If we average out the bearish and the bullish cases, the price comes out to be $4.85, which means price appreciation of 4.5%. So, the company paints an encouraging outlook with a striking total return of 13%.

Risks

With the help of aggressive marketing, cable companies are becoming a serious threat to the company. Poor economic conditions continue to be a threat for the company as any additional spending by consumers is dependent on an economic recovery. Regulatory risk continues to be an important factor as it can change the industry dynamics.

Conclusion

Companies	P/S	P/BV	Next 5 yr Growth rate (per annum)	PEG
CenturyLink, Inc.(CTL)	1.01x	1.10x	1.30%	8.70
Windstream Holdings, Inc. (WIN)	0.81x	5.75x	-20.50%	-1.16x
FTR	0.96x	1.19x	21.80%	0.93x

Source: Yahoo Finance

I believe FTR is the best company among the regional local exchange carriers with the highest growth rate for the next 5 years. Also, it offers the cheapest growth among its peer companies. FTR is also trading at cheap valuations, based on the multiples Of P/S and P/BV. So, I believe that overall FTR provides a compelling opportunity.

Source: Frontier: The Best Of The Lot With Significant Price Appreciation Potential

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. (More...)

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