If Frontier Communications (FTR) and T-Mobile (TMUS 0.55%) were homes, one would be a condemned teardown while the other would be move-in ready with top-tier finishes. Both, however, would be located in a nice neighborhood.
As anyone who watches one of the many shows devoted to house buying and home flipping knows, there's an argument to made for both types of purchases. A tear-down in a good neighborhood makes sense at the right price, while paying more to have everything already done has its appeal as well.
The case for Frontier
Frontier, of course, is the teardown. The cable, internet, and phone company has lost subscribers in every quarter since it bought Verizon's wireline business in California, Texas, and Florida (CTF) in April 2016.
The company paid $10.54 billion for approximately 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million cable subscribers. That move was supposed to give Frontier the scale it needed so it could have the operational synergies required to compete with the big boys.
On the plus side, the deal did allow the company to cut its expenses, with over $1 billion of $1.4 billion in savings already realized. The problem is that Frontier keeps getting smaller. As of the close of Q3, it had lost about 600,000 customers over a 9 month period year-to-date. That's a significant number for a company that closed Q3 with only 4.95 million total customers.
Frontier has also been losing money. It lost $1.19 per share in Q3, and has lost $12.07 per share through three quarters, though that does include some one-time charges.
Steady losses have forced the company to slash its dividend in an effort to preserve cash. It has also had to reverse-split its to stock to maintain its listing.
None of that make the stock a buy, unless you look at it and see potential. Pay-television may be a shrinking business, but selling internet service is a good neighborhood to be in. CEO Dan McCarthy certainly thinks so.
"Our third quarter results highlight the ongoing stabilization across our business as we focus on executing our strategy," he said in the Q3 earnings release. "During the quarter, we were pleased with the continued improvement in subscriber trends and churn in our California, Texas and Florida (CTF) markets, ongoing stabilization in our commercial business, and continued operating efficiencies."
The case for T-Mobile
T-Mobile is the house that has already been fully renovated, complete with top-tier finishes, really nice appliances, and touches that are modern, but not so modern as to be off-putting. The company has undergone a complete rebirth since branding itself "the Un-carrier" in late 2012, and has posted 18 straight quarters where it added at least 1 million subscribers.
This is a company that has been steadily rising while taking share from its rivals. It has also dramatically improved its network. even taking first place on some (but not all) of the generally accepted studies that rate network quality.
T-Mobile is in great shape, and the only concern for investors is how much room it still has to grow. That seems like a small concern for a company that has steadily innovated and been able to stay ahead of its rivals. Still, sometimes being the nicest house on the block does make it hard to sell for what a home is actually worth.
Which is a better buy?
In stocks, as in houses, getting a deal on a fixer-upper comes with more risk, but also more possibility for reward. The problem is that if your house has termites, mold, an ancient curse, or it was the scene of a highly publicized murder, no amount of rehab can ever bring it back to a point where you get your money back.
Frontier may not be there, but it's in bad shape, and its future is less than secure. T-Mobile shares have already steadily climbed for the past five years, and while growth may slow at some point, the company should keep growing.
T-Mobile is a better buy because it has upside, a track record, and far less risk. Frontier has the potential of being a grand slam if McCarthy can get it to a financially stable point. That's just not very likely, and the potential reward is not worth the real risk of the company going to zero.