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Better Buy: Frontier Communications Corporation vs. AT&T

By Daniel B. Kline - Oct 6, 2017 at 8:02PM

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Neither company has an easy road ahead.

When you look at Frontier Communications (FTR) and AT&T (T 1.67%), you see two companies with very similar problems. Even though Frontier's issues are more obvious than its sort-of rival's, both companies risk significant ongoing subscriber loss.

In fact, both AT&T and Frontier have been steadily losing cable and broadband customers. That's not something likely to lessen anytime soon because it's being driven by market conditions (cord-cutting) in pay television and technology in broadband (consumers prefer cable to phone-based internet).

It's fair to say that prospects are bleak for both of these companies. One, however, does have a much stronger chance of weathering the storm, and that alone makes it a better buy.

A man takes a pair of scissors to a cable cord

Cord-cutting has been a problem for both companies. Image source: Getty Images.

What's wrong with Frontier?

Since it spent $10.54 billion buying Verizon's wireline business in California, Texas, and Florida (CTF), Frontier has been moving in the wrong direction. In closing the CTF deal, Frontier took ownership of roughly 3.7 million voice connections, 2.2 million broadband connections, and 1.2 million FiOS video connections in those three states.

In every quarter since the deal closed, Frontier has lost cable and internet customers. The company has blamed that on complications from the switch, and a lack of marketing, but it's actually an industrywide problem.

Most pay-TV companies are losing customers to cord-cutting. Frontier has not been different in that respect, dropping 255,000 pay-TV subscribers in 2016 and 181,000 through two quarters of this year, according to data from Leichtman Research Group (LRG). Those losses have not been made up in broadband, where the company lost 243,000 subscribers in 2016 and 208,000 in the first six months of this year.

Those trends are likely to continue because cord-cutting has slowly been gaining steam -- and companies that deliver internet over telephone-based technology have generally been losing internet users. Frontier also has the added drag of having cut its dividend and undergone a reverse stock split.

What's wrong with AT&T?

The telecom giant faces the same issues in its pay-TV and broadband businesses that Frontier does. Across its U-verse and DirecTV units, the company lost 131,000 television customers in 2016 and 364,000 more through two quarters of 2017, according to LRG data. That's a decidedly negative turn, driven by DirecTV going from gains in 2016 to a loss in 2017. In broadband, where only U-verse offers service, AT&T lost 173,000 customers in 2016 but then offset that by adding 81,000 back through half of 2017.

AT&T, of course, also has its wireless business, which has been adding customers, but it faces significant pricing pressure driven by competition from T-Mobile and Sprint. That will probably drive margins down in that part of the business, which has been a strength for the company.

Which is a better buy?

Even though you can buy Frontier shares at or near historic lows for the company (when adjusted for the reverse split), AT&T remains a better deal. That's because while it has struggled and will continue to lose subscribers in cable and broadband, AT&T has more ways to reverse that or replace the income than Frontier does.

AT&T can leverage DirecTV, U-verse, and wireless to drive bundle sales. It can also offer its DirecTV Now streaming service to as a way to entice cord cutters to use its broadband service. No clear blueprint for returning to growth has been delivered by the company, but its many assets and still-huge customer base give it a much better chance of getting things right compared to Frontier.

For the smaller company, it's hard to see a path to survival, let alone success. The company has created added runway by engineering over $1 billion in cost savings while also reworking some of its borrowing, but it loses money every quarter. Eventually, Frontier will either be sold or run out of money.

Neither of these stocks is one I recommend. Yet AT&T is the better of the two because getting a good deal on a sinking ship offers less value than paying more for one that's just taking on water, but not sinking anytime soon.

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