Why Frontier Communications Shares Flopped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of communications company Frontier Communications (Nasdaq: FTR  ) hung up on shareholders today, falling as much as 10%, after the company reported its first-quarter results.

So what: For the quarter, Frontier's revenue fell nearly 6% to $1.27 billion, with adjusted net earnings of $0.05. Revenue results squeaked by Wall Street's expectations while EPS results met or missed depending on the source of the estimate. Despite the decline in sales and the loss of approximately 10% of its residential and business customers from this time last year, Frontier did reaffirm its full-year forecast.

Now what: Since agreeing to purchase part or all of Verizon's (NYSE: VZ  ) landline assets in 14 states, Frontier has struggled with high debt levels, falling subscriber rates, and has even had to trim its delectable dividend. Despite being negative on the company for years, my tune is beginning to change. If Frontier can indeed meet its own guidance, then at 14 times forward earnings and valued below book, this just might be a fantastic value.

Craving more input? Start by adding Frontier Communications to your free and personalized watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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Read/Post Comments (5) | Recommend This Article (9)

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  • Report this Comment On May 07, 2012, at 3:13 PM, gcmagone wrote:

    Always darkest before dawn.... Frontier's rural towns will continue to need telecommunications.

  • Report this Comment On May 07, 2012, at 6:54 PM, 1caflash wrote:

    Good luck. My frontier play is Rocky Mountain Chocolate Factory, headquartered in Durango, Colorado. It is an easier business to understand and RMCF recently increased its quarterly dividend and is trying to gradually expand into Japan and China. Sometimes, I try catching a falling knife (ouch!), especially if I already have some shares, so May 7, 2012, I doubled my PETS position. I believe Pet Med Express will get its act together, and the 18 to 20% price drop during one trading session made the yield higher. Also, there are some positives in the earnings report which I feel do not justify such a massive stock-price decline.

  • Report this Comment On May 07, 2012, at 9:16 PM, pugwee wrote:

    The numbers FTR posted today do not surprise me at all. I have been expecting it for a long time and here is my reason.

    FTR has or is loosing focus on the type of business they are in. They are not just a telecom business, they are a service business and their business area has just expanded by a large amount. Now there is always a cost related to expansion, but that cost should always be limited to dollars not customers. In FTR's case they have focused more on the dollars than the customer, forgetting they are in the "service" business. They have compitition that also offers the same services they do. FTR needs to get back to basics and focus on customer satisfaction. They have been bleeding customers at a rate should have sent red flares daily into Maggie's office since last year. I'm considered a small time investor so I don't get to ask these kinds of questions during the meeting, but this is a question that should be asked and answered. What is FTR doing about it's lack of customer service? If you have good or great customer service you don't loose customers you gain them, FTR is loosing a lot of customers and that should be a very large red flare to those that are running the company.

    Aside from how the customer service side is being run, let's look at some other things. Just before the Div was cut Maggie had a large amount of shares sold, I'm not talking about months before, I'm talking about days. Something seems odd about this. Granted it wasn't from her personal stash, it was from some type of trust, but it still seems odd that these shares were sold just prior to the Div cut, but Maggie was still saying the Div's were safe and they weren't going to be cut. Seems a bit odd to me.

    Don't get me wrong, I still hold my shares of FTR and I'm thinking about buying more. As long as they are paying some type of Div's things will be fine. I am only getting 5% now after the cut, but that's still better than a lot of companies and I haven't lost anything because I haven't sold.

    Real questions should be asked about how the management is running the company and what they are doing to fix the problems that are so apparent. The aquired technology should be already be through out the company and areas not served by these technologies should be set up to recieve it.

    One last note, I think it was a terrible idea to drop FIOS TV, that shows a very clear that someone has a very narrow view of what the company is and what it could become.

  • Report this Comment On May 08, 2012, at 10:24 AM, friscotelecom wrote:

    I feel bad for Frontier employees. They will be the ones to get punished for the misdeeds of the FTR management. There is plenty of money to be made in telecom, however not the way the FTR mgmt is going about it. The mgmt has systematically eliminated anyone who raised flags, who pointed out obvious management problems or offered simple cost effective solutions (low hanging fruit). Instead, FTR mgmt has surrounded themselves by consulting firm yes men and Verizon haters who were only interested in their fees and royalties. In essence, Rochester is oblivious to what is happening with operations and only see and hear what the consulting firm yes men filter through.

    Frontier has made a lot of hoopla over converting and integrating VZ customers into the FTR infrastructure which on face value sounds good, however, anyone in the know will tell you that the legacy Citizens mainframe systems are 30 yr old technology which are impossible to integrate into the self service demands of today or their product offerings. More mgmt smoke and mirrors and more consulting firms padding their pockets at the peril of FTR employees, customers and investors.

    Management has continuously been blaming Verizon for all their woes, but this can only go so far and investors will buy this line of bs only for so long. It is very true that Verizon sold them a declining business, however, at deal close (7/2010), FTR had 7.2 mil sub lines, now they are down to roughly 5.2... 2 mil less (about a 5 bil hit to the value). A 5 yr old child could do better. Poor customer service, lack of competitive offerings and poor infrastructure (broadband availability, network capacity, etc) are all to blame. No effort was made to remedy any of these issues. Instead, managements version of the fix was 'ineffective aggressive and annoying marketing tactics'.

    Verizon was very shrewd to shed these assets using the Reverse Morris Trust. Frontier mgmt and investors set themselves up for a failure.

    Sooner the mgmt is swept out the door starting with Maggie... the better.

  • Report this Comment On May 08, 2012, at 4:10 PM, BuonaFortuna711 wrote:

    Yup. Time for Maggie, the consultants, the haters, and frankly, the dopes on the Board who reward terrible performance with more stock gifts to go.

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