Frontier Communications Corporation
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- Sophia Dean
- 5 years ago
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1 January 20, 2015 Frontier Communications Corporation Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 02/27/2006 Current Price (01/19/15) $6.83 Target Price $7.25 SUMMARY (FTR-NASDAQ) Frontier Communications reported third-quarter 2014 results with the top line meeting the Zacks Consensus Estimate and the bottom line beating the same. We believe that the backhaul revenue pressure, integration costs as well as higher financial leverage will continue to weigh on the company s earnings. However, product introductions, broadband expansion and cash flow management by operating expense reduction should prove accretive. Additionally, changes in the channel distribution structure and Frontier s relentless focus on infrastructural development, enhancement of network speed and shareholders return bode well for long-term growth. We thus maintain our Neutral recommendation on Frontier Communications. 52-Week High $ Week Low $4.42 One-Year Return (%) Beta 0.67 Average Daily Volume (sh) 6,058,323 Shares Outstanding (mil) 1,002 Market Capitalization ($mil) $6,844 Short Interest Ratio (days) Institutional Ownership (%) 63 Insider Ownership (%) 1 Annual Cash Dividend $0.40 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 15.8 Earnings Per Share (%) Dividend (%) using TTM EPS 31.0 using 2015 Estimate 28.5 using 2016 Estimate 28.5 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Average, Type of Stock Large-Blend Industry Wireline - Regi Zacks Industry Rank * 113 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,205 A 1,191 A 1,185 A 1,180 A 4,761 A ,154 A 1,147 A 1,141 A 1,365 E 4,807 E ,412 E 1,403 E 1,401 E 1,399 E 5,615 E ,494 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.05 A $0.06 A $0.06 A $0.07 A $0.24 A 2014 $0.05 A $0.05 A $0.05 A $0.05 E $0.20 E 2015 $0.06 E $0.06 E $0.06 E $0.06 E $0.24 E 2016 $0.24 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606
2 OVERVIEW Based in Stamford, CT, Frontier Communications Corporation is a communications company providing services to rural areas and small and medium-sized towns and cities. Frontier offers voice, high-speed Internet, satellite video, wireless Internet data access, data security solutions, bundled offerings, specialized bundles for small businesses and home offices, and advanced business communications access solutions for medium and large businesses. It operates across 27 states with approximately 14,017 employees. The company also provides television services, which allows access to various digital television channels featuring movies, sports, news, music, and high-definition TV programming; and wireless data services. Formerly known as Citizens Communications Company, Frontier Communications Corporation changed its name to the present form in Jul The company s customers include both residential and business. Its services include access services; local services; long distance services; data and Internet services; directory services; television and wireless services. Residential and business customers accounted for approximately 42% and 46%, respectively, of the total revenue in Regulatory services accounted for 12% of the total 2013 revenue. In Jul 2010, Frontier Communications had acquired Verizon Communications Inc.'s local wireline operations in 14 states. With this acquisition, Frontier has taken control of over 4.8 million Verizon phone lines, trebling its size to become the largest rural-only service provider in the United States. In Apr 2012, Frontier announced the disposition of its one-third stake in regional telecom carrier Mohave Wireless to Verizon Wireless. REASONS TO BUY Frontier focuses on generating additional revenues through customer retention, market share gain, new product introductions, broadband expansion as well as improved sales and marketing initiatives. We believe that the company is presently focusing on cost control by bringing about productivity and customer oriented enhancements, thus improving efficiencies of its daily operations. We are also encouraged by sustainable broadband subscriber growth supported by strong network expansion and improved pricing structure. Management also foresees strong momentum in broadband subscriber growth in the third quarter of 2014 and expects the growth to accelerate through the rest of the year. In Jan 2013, the company reorganized its business structure by decentralizing the sales and marketing functions. The company continues to offer attractive packages of value-added services to local access line customers. Its bundled services include High-Speed Internet (HSI), unlimited long distance calling, enhanced telephony features, and video offerings (direct broadcast satellite services from DIRECTV and the DISH Network, FiOS services in certain states and over-the-top video on myfitv.com). DISH Network recently renewed its multi-year existing business agreement with Frontier. In addition, the company remains focused on new product development including Hughes Satellite Broadband, Residential VoIP (voice over internet protocol) and Commercial Data Products. Frontier s Anywhere Hosted Business Telephone System provides incremental revenue opportunity for the company and is off to a good start post its first quarter 2014 launch. Meanwhile, the company expects the backhaul transformation to be completed in the first half of 2014 and eventually provide a stable revenue opportunity. Recently, the company also reached an agreement with the Connecticut Attorney General and the Office of Consumer Counsel (OCC). Equity Research FTR Page 2
3 We remain optimistic about Frontier s collaborations with other companies to offer differentiated products to complement customers needs. On Oct 24, 2014, Frontier Communications completed its $2 billion acquisition of AT&T s wireline operations in Connecticut and its related statewide fiber network and U-verse operations. The company will now offer broadband, voice, video and other products to residential and business customers in Connecticut. AT&T s wireline operations in Connecticut have provided the company with 900,000 voice connections in the region. This includes U-verse Voice over IP and traditional voice services. In addition, AT&T also provides Frontier with approximately 415,000 broadband connections in the region, which would incorporate 245,000 U- verse and 70,000 DSL customers. In addition, Frontier will also have access to AT&T s 180,000 U- verse video subscribers. Moreover, AT&T will transfer 2,700 employees managing its Connecticut operations to Frontier as the deal closes. Notably, the company raised its outlook as a result of its recent acquisition of AT&T s wireline operations in Connecticut. Notably, Frontier Communications expects 2014 leveraged free cash flow in the range of $755.0 million to $780.0 million. Further, the company expects capital expenditures of $575 million to $600 million and cash taxes of $75 million to $90 million. Interestingly, acquisition and integration costs related to the AT&T Connecticut transaction are excluded from this guidance. In November, Frontier Communications announced the addition of two new channels Hallmark Channel and Hallmark Movies & Mysteries for its Connecticut customers. These new channels will be available to both residential and business customers of Frontier TV across Connecticut. In Nov 2014, the company also added fast-growing worldwide sports network, bein SPORTS Network, to its Connecticut line-up for Frontier TV customers. bein SPORTS Network covers a number of sporting events including tennis, rugby, soccer, motorsports, cycling, boxing and handball. We believe the addition of these new channels to its existing line-up will help the company decrease its churn rate which has been a major hurdle for the company over the past few quarters. In the third quarter of 2014, Frontier Communications churn rate increased to 1.86% from 1.81% in the third quarter of The company prioritizes network expansion and dividend payment over debt reduction. For 2014, Frontier guides capital expenditures and free cash flow in the bands of $575 $625 million and $725 $775 million, respectively. The company s dividend payout ratio stood at 44% in the second quarter. In terms of balance sheet position, Frontier s long-term debt decreased to $7,650.8 million at the end of the quarter from $7,873.7 billion at 2013-end. The company wants to use its free cash flow to repay immediate debt and meet long-term leverage ratio target of 2.5x. REASONS TO SELL Frontier remains significantly challenged by slow economic recovery in its service territories and competes with the loss of legacy fixed telephony business to wireless and other offerings. Approximately 65% of Frontier s access lines are exposed to cable voice service offerings. The persistent decline in access lines continues to tighten local service revenue, which accounts for most of Frontier s overall revenues. eteriorating wireless backhaul business is expected to remain a headwind for Frontier, given the fact that it has not invested heavily in the same and is expected to have a negative revenue impact of $25-$30 million in Approximately 12% of the 2012 revenue was from regulated sources including the Universal Service Fund or USF (telecom funding for lower income and rural consumer coverage), inter-carrier compensation (fee that carriers pay each other when they connect telephone calls) and others. Frontier continues to experience decline in regulatory derived revenues (access service revenue) due to lower subsidy payments received under the federal program. In Nov 2011, the Federal Communications Commission (FCC) reformed its USF and inter-carrier compensation rules and highlighted its efforts to expand high-speed Internet services to rural areas over the next six years Equity Research FTR Page 3
4 ( ). It will reduce access and compensation rates charged by Frontier over the next six years, resulting in significant decline in the company s access revenues. This will also result in lower profits in 2014 and beyond. Customer churn was 1.86% in the reported quarter versus 1.81% in the third quarter of On a year-over-year basis, voice revenues declined 7.5% to $471.8 million and data and Internet services revenues slipped 0.5% to $468.8 million. We believe that a decline in revenues from voice and other businesses could affect EBITDA growth. As of Jun 30, 2014, Frontier had approximately 13,910 employees. Approximately 8,400 of these employees are represented by unions and subject to collective bargaining agreements. There are approximately 1,200 employees covered under collective bargaining agreements slated to expire in In addition, the company has extended the period of expiry to 2014 for 2,600 employees covered under collective bargaining agreements that were suppose to expire in If the company is unable to enter into new agreements regarding union acceptable terms and conditions, the scenario may worsen further and lead to strikes, work stoppages, wage hikes or other labor actions. These would result in increased cost of operations, and in turn, adversely affect the company s profitability. Recently, Frontier issued $1.55 billion senior notes to finance the acquisition of the wireline assets of AT&T Inc. in Connecticut which is expected to close in the fourth quarter of This issuance will certainly increase the leverage of the balance sheet. Further, in 2014, the company expects an additional operating expense of $140 $170 million and capital expenditure of $85 $105 million in relation to its acquisition and integration activities of AT&T Inc. s Connecticut business. In addition, cash tax expense is estimated in the range of $130 $160 million. We believe that these cost headwinds will weigh on the near-term financial performance of the company. RECENT NEWS Frontier (FTR) Tops Earnings by a Penny, Revenues in Line Nov 3, 2014 Frontier Communications Corp. (FTR) provider of telecommunication services to rural areas reported its third-quarter 2014 adjusted earnings per share of $0.05 that came in a penny ahead of the Zacks Consensus Estimate. The bottom line, however, declined 16.7% on a year-over-year basis. On the other hand, quarterly revenues of $1,140.9 million, which were in line with the Zacks Consensus Estimate, dropped 3.7% year over year. The year-over-year decrease in the top line was primarily due to a decline in revenues from voice services and data and internet services. On a year-over-year basis, voice revenues declined 7.5% to $471.8 million and data and Internet services revenues slipped 0.5% to $468.8 million. On the other hand, other revenues registered growth of 10.6% to $76 million. Operating Income Adjusted operating income in the third quarter declined 4.4% year over year to $197 million. Adjusted operating margin was 19.2% compared with 22.2% in the year-ago period. Customer Trends At the end of third-quarter 2014, the number of residential customers touched 2,740,278, while business subscribers totaled 260,823. Customer churn was 1.86% versus 1.81% in the third quarter of Equity Research FTR Page 4
5 Frontier added 21,855 broadband users in the quarter to reach 1,953,376 (up 6.2% year over year). As of Sep 30, 2014, video subscribers totaled 395,899 (up 4.8% year over year). Liquidity Frontier exited the third quarter with $808.5 million of cash and cash equivalents compared with $880 million at year-end Long-term debt increased to $9,185.6 million at the end of the quarter from $7,873.7 million at the end of In the third quarter, the company incurred capital expenditure of $152.4 million for business operations, as against $157.6 million in the year-ago quarter. The company also spent $40.7 million during the quarter on account of integration activities related to the pending AT&T-Connecticut transaction. Free cash flow was $149.1 million against $232.2 million in the year-ago quarter. Dividend The company has paid a total of $300.6 million in dividends in the first nine months of this year, which equals to a payout of 50% of free cash flow generated through the same period. This includes dividend payments of $100.2 million in the third quarter alone, which is equal to a payout of 67%. VALUATION Frontier is currently trading at 28.5x our fiscal 2014 earnings estimate. This is on par with the industry average but at a premium to the S&P 500. With respect to our fiscal 2016 earnings estimate, the stock is trading at 28.5x, which again reflects an in-line figure with the industry average and at a premium to the S&P 500. We expect Frontier to generate higher revenues in the coming months based on a number of strategic initiatives. The enhancement of broadband deployments, new product offerings and acceleration in offline channel growth are expected to induce better performance. However, we are concerned about regulatory and competitive pressure, decline in CPE sales and access line losses that are hurting the company s prospects. Hence, we have a Neutral recommendation with a target price of $7.25 based on 30.2x our 2015 earnings estimate. Equity Research FTR Page 5
6 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low FRONTIER COMMUN (FTR) Industry Average S&P GENL COMMS INC (GNCMA) CONSOL COMM IL (CNSL) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA FRONTIER COMMUN (FTR) Industry Average S&P Equity Research FTR Page 6
7 Earnings Surprise and Estimate Revision History Equity Research FTR Page 7
8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of FTR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1114 companies covered: Outperform %, Neutral %, Underperform 6.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research FTR Page 8
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October 28, 2014 Healthways Inc. Current Recommendation Prior Recommendation Earnings Update SUMMARY DATA Healthways report Q3 OUTPERFORM Neutral Date of Last Change 08/06/2014 Current Price (10/27/14)
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February 19, 2015 Terex Corporation Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 01/04/2015 Current Price (02/18/15) $26.80 Target Price $28.00 52-Week
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March 12, 2015 Dillard s Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 01/05/2014 Current Price (03/11/15) $130.28 Target Price $137.00 52-Week High
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February 02, 2015 Simon Property Group Inc. (SPG-NYSE) Analyst Note NEUTRAL Current Recommendation Prior Recommendation Underperform Date of Last Change 09/11/2014 Current Price (01/30/15) $198.66 Target
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January 29, 2015 CONMED Corporation Current Recommendation NEUTRAL Prior Recommendation Underperform Date of Last Change 11/21/2012 Current Price (01/28/15) $47.14 Target Price $49.00 Earnings Update-
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February 11, 2015 KB Home (KBH-NYSE) Current Recommendation Prior Recommendation Neutral Date of Last Change 02/11/2015 Current Price (02/10/15) $13.61 Target Price $12.00 UNDERPERFORM SUMMARY We are downgrading
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February 9, 2015 Motorola Solutions Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 12/02/2014 Current Price (02/06/15) $64.66 Target Price $68.00
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March 18, 2015 DENTSPLY International Inc. Current Recommendation Prior Recommendation NEUTRAL Outperform Date of Last Change 02/19/2012 Current Price (03/17/15) $51.13 Target Price $54.00 SUMMARY (XRAY-NASDAQ)
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February 09, 2015 Snap-On Inc. (SNA-NYSE) NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 09/26/2011 Current Price (02/06/15) $140.99 Target Price $148.00 SUMMARY Keeping
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February 24, 2015 HSBC Holdings plc ADR (HSBC-NYSE) Analyst Note NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 12/21/2014 Current Price (02/23/15) $44.68 Target Price
More informationFederated Investors, Inc.
March 04, 2015 Federated Investors, Inc. Current Recommendation Prior Recommendation Underperform Date of Last Change 11/30/2014 Current Price (03/03/15) $33.52 Target Price $35.00 NEUTRAL SUMMARY (FII-NYSE)
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February 10, 2015 athenahealth Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 10/23/2011 Current Price (02/09/15) $136.28 Target Price $143.00 52-Week
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February 19, 2015 Avon Products Inc. Current Recommendation Prior Recommendation Neutral Date of Last Change 02/19/2015 Current Price (02/18/15) $9.10 Target Price $8.25 SUMMARY DATA UNDERPERFORM 52-Week
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March 17, 2015 Flowserve Corporation Current Recommendation Prior Recommendation Underperform Date of Last Change 12/18/2014 Current Price (03/16/15) $56.96 Target Price $60.00 NEUTRAL (FLS-NYSE) SUMMARY
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February 16, 2015 The PNC Financial Services Group, Inc. (PNC-NYSE) Current Recommendation Prior Recommendation Outperform Date of Last Change 05/04/2010 Current Price (02/13/15) $92.38 Target Price $97.00
More informationCabot Oil & Gas Corporation
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October 30, 2014 Vistaprint N.V. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 08/07/2013 Current Price (10/29/14) $55.06 Target Price $58.00 52-Week High
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February 13, 2015 BorgWarner Inc. Current Recommendation Prior Recommendation Underperform Date of Last Change 03/24/2013 Current Price (02/12/15) $61.38 Target Price $64.00 NEUTRAL (BWA-NYSE) SUMMARY
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March 09, 2015 The Mosaic Company Current Recommendation Prior Recommendation Neutral Date of Last Change 03/09/2015 Current Price (03/06/15) $49.03 Target Price $59.00 OUTPERFORM (MOS-NYSE) SUMMARY We
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February 02, 2015 Xerox Corporation Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 10/18/2012 Current Price (01/30/15) $13.17 Target Price $14.00 52-Week
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January 28, 2015 Liberty Global plc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 09/22/2013 Current Price (01/27/15) $46.67 Target Price $49.00 52-Week
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March 18, 2013 Sinopec Shanghai Petrochemical Co. Ltd. (SHI-NYSE) NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 06/10/2008 Current Price (03/15/13) $42.10 Target Price
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