On June 27, 2014, we issued an updated research report on Frontier Communications Corp. (FTR). We believe the company’s efforts in the form of product deployment, broadband expansion and cash flow management by reducing operating expenses would remain accretive to the company’s growth. However, decline in residential customers along with lower switched access and non-switched access revenues remain a concern for the company. Frontier currently carries a Zacks Rank #3 (Hold).
We remain encouraged by sustainable broadband subscriber growth supported by strong network expansion and improved pricing structure and expect it to accelerate in the rest of 2014. Frontier also remains committed to control costs by focusing on productivity and customer oriented enhancements, thus improving efficiencies in its daily operations.
Frontier has also made changes in the channel distribution structure, which will continue to benefit the company. The carrier expects acceleration in offline channel growth owing to ramp up of sales effort of additional channel partners, particularly in residential and small and medium-business segments.
Moving on, Frontier is awaiting regulatory approval to acquire AT&T Inc.’s (T) wireline operation in Connecticut, which will provide the former with 900,000 voice connections in the region. In addition, Frontier will gain AT&T’s 180,000 U-Verse video subscribers and 415,000 broadband connections. Further, the carrier plans to extend U-Verse service to 100,000 customers in regions where U-Verse is currently present as well as in those which it still does not cater to.
However, Frontier remains significantly challenged by slow economic recovery in its service territories and is coping with the loss of legacy fixed telephony business to wireless and other offerings. A decline in customer premise equipment or CPE sales in first-quarter 2014 remains a concern for the company.
Additionally, the company is struggling with the effects of customer loss and rising costs. Frontier’s local and long distance service revenue dropped during the first quarter as more users migrated from the traditional landline service. Deteriorating 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 2014. We thus remain sidelined on the stock at present.
Key Picks from the Sector
Some notable stocks within this sector are Cbeyond Inc. (CBEY) and BT Group plc (BT). Both the stocks bear a Zacks Rank #2 (Buy).
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