We are maintaining our long-term Neutral rating on Frontier Communications Corp. (FTR) following its second quarter results.
Frontier’s earnings missed the Zacks Consensus Estimate by a penny and declined from the year-ago earnings. However, revenue more than doubled on the back of West Virginia operations acquired from Verizon Communications’ (VZ) fixed-line business.
Frontier’s high-speed Internet and satellite TV subscriber bases are expanding on aggressive bundled service offerings and promotional initiatives. The company focuses on generating new revenues through customer retention, customers win, new product deployments, broadband availability expansion as well as management of profitability and cash flow through decreased operating expenses and capital expenditures.
Frontier is expected to ramp up its broadband capability and convert its newly acquired rural fixed-line from Verizon into its own systems in 13 states. The conversions would provide cost synergies of approximately $600 million, up from the previous expectation of $550 million, by the end of next year and boost earnings.
Further, the newly acquired lines will enhance Frontier’s broadband deployment in institutions such as libraries, hospitals and government buildings in un-served and under-served communities. The expansion will lead to increased revenue and lower churn going forward.
On the other side, Frontier faces integration risks in converting the acquired Verizon properties to its own system over the next couple of years. Additionally, intense competition and regulatory pressure will restrict operating results going forward.
Moreover, we believe Frontier’s ongoing expansion efforts primarily related to broadband network infrastructure expansion may continue to stretch borrowing initiatives and the balance sheet. The company operates with a high debt level of approximately $8 billion.
Net debt to adjusted operating cash flow (leverage) was 3.08 times as of June 30, 2011. However, Frontier is trying to reduce its leverage to 2.5 times through a combination of EBITDA improvements and debt reductions.
Our long-term rating is supported by the Zacks #3 Rank (Hold).
FRONTIER COMMUN (FTR): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment