You have to have sympathy for Frontier Communications Corp (NASDAQ:FTR). As an aging telecom business in an age where technology was rapidly changing, the company and FTR stock were facing a whole bunch of challenges.
About two years ago when FTR purchased the Verizon Communications Inc. (NYSE:VZ) wireline business for more than $10 billion, it seemed like a pretty good move. After all, it came with some 3.3 million voice subscribers, 2 million broadband subscribers and 1.2 million FiOS subscribers.
Alas, things move quickly in technology and telecom these days, and this deal turned into an albatross. FTR has since lost over three quarters of a million subscribers. With the loss of subscribers came a loss of revenue, as well as declining cash flow, and that meant that the dividend had to be cut. And the dividend was indeed cut by almost 60% to four cents per share.
Things are so bad at the company that FTR stock had to engineer a 1-for-15 reverse split in order to even stay listed on the exchange.
How bad is the communications business these days? Net margins for FTR are literally less than 1%. That’s right, the company generated $20 million of net income in the most recent quarter on $2.2 billion in revenue.
While there have been gross additions across the board over the past six quarters, net losses continue to be a problem. The good news is that after 157,000 net declines in Q4 of 2016, the loss was only 20,000 in the most recent quarter across all product divisions.
The good news is that FTR stock is generating operational cash flow. It was $251 million in this quarter, coming on top of $665 million in Q4. LTM operating free cash flow was $632 million in the quarter.
In the meantime, the company has to pump out a billion dollars in capex in order to
keep up with technological developments. FTR is looking to spend a little over $1 billion this year alone, of which $300 million has been spent thus far.
Frontier Communications was also able to buy time by refinancing $1.65 billion in senior unsecured notes due in 2020 and 2021 with $1.6 billion in second lien notes 2026.
Frontier will also be putting out some additional cash by paying $2.78 per share of a convertible preferred issue. Those convertible preferred issues will all convert to common stock at the end of June. That also means more dilution for common stockholders.
FTR also suspended its common dividend some months ago.
Bottom Line on FTR Stock
The question is why would anyone would want to hold FTR stock at this point? As recently as Tuesday, its price was $8.15. If you back out the reverse split, it essentially means that the stock will be trading at around $0.60 a share.
The company no longer pays a dividend, so there’s no point in chasing. The real question here is whether aggressive or speculative investors think there is possible trading upside.
I personally think that there are other trading opportunities out there that present less risk with more likely upside, on stocks representing businesses that are in much better shape.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
