Sometimes it's possible to find value where it appears there isn't any. Maybe that old, scruffy jacket just needs a cleaning. Or an old car buried under a layer of rust is actually a classic waiting to be restored.
In those cases, you need to have the vision to see something desirable when the outer appearance screams something else entirely. Those types of situations are common on the stock market, too: a beaten-down company can be a hidden gem about to turn a corner.
Frontier Communications (NASDAQ:FTR) isn't one of those stories. It's a company that's losing money as its customer base shrinks, and has cut its dividend and conducted a reverse split of its stock. There are signs that the company has started to trim its losses, but that will only slow down the inevitable.
How bad is it?
When Frontier bought Verizon's (NYSE:VZ) wireline business in California, Texas, and Florida (CTF) in April 2016, the deal made sense. The company was spending $10.54 billion for approximately 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million cable subscribers. That huge expenditure would, in theory, give the company the scale and synergy it needed to compete with larger players.
What Frontier didn't count on was that the market was changing. Cord-cutting sped up, and companies offering internet delivered via telephone-based technology saw their subscriber bases drop at the same time. That was a double punch to Frontier, which caused it to lose subscribers and money in each quarter since the Verizon deal closed.
|Quarter||Net Loss||Customers Lost|
|Q3 2106||$134 million||67,000|
|Q4 2016||$133 million||158,000|
|Q1 2017||$129 million||173,000|
|Q2 2017||$715 million*||162,000|
|Q3 2017||$92 million||109,000|
Is it getting better?
Frontier CEO Daniel McCarthy has done a good job managing the company's finances and did trim Frontier's losses in Q3, both in terms of customers and on a dollar basis.
"Our third quarter results highlight the ongoing stabilization across our business as we focus on executing our strategy," said McCarthy 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."
These numbers are better, but they're still moving in the wrong direction. It's also worth noting that cord-cutting slowed across the entire industry in Q3, with Frontier's losses being proportional to those of its rivals.
Is there a happy ending here?
Frontier has cut over $1 billion in operating expenses, with plans to save another $350 million more. That's good news, but it does not change the overall long-term prospects for the company.
The best-case scenario for Frontier is that it manages to cost-cut its way to breakeven. That's unlikely, but even if it happens, just holding on is not the same as succeeding.
Industry trends are working against Frontier. Verizon likely sold these properties because it saw that telco-based cable and internet companies would be hurt by cord cutting without being able to make up the losses on the broadband side.
Frontier's stock price is low because the company has little value. It's a wounded animal slowly bleeding to death. It might hold on for a long time, and there's always the chance it gets acquired -- but the company has a failing business model that's unlikely to be fixed.