Some stocks are great stocks to invest in -- stocks that can be held over a long period. In short, they are true Foolish stocks. With due diligence, you can definitely find such stocks. Let's see if Frontier Communications (NYSE: FTR) has what we're looking for.
What it does
Like most telecom companies, Frontier provides a typical array of services to residential and business customers, including voice, television, and data and Internet services. After several years of mediocre performance and stagnant revenue, Frontier saw sales jump almost 80% in 2010, thanks mostly to its $5.2 billion acquisition of Verizon's (NYSE: VZ) landline business last July. But the move caused margins to fall somewhat, due in part to 38% higher interest expense resulting from financing the Verizon transaction.
An impressive development
In particular, the acquisition from Verizon included the assumption of a $3.5 billion principal amount of debt. This increased the company's long-term debt from $4.8 billion at the end of 2009 to nearly $8 billion currently. However, it is encouraging to see that even with higher debt levels, the company has actually seen an increase in its coverage ratio, showing that it's actually better able to service its debts after the acquisition.
It's troubling to see returns on equity drop so sharply -- from 28.4% in 2009 to just 5.6% last year -- especially as competitor CenturyLink (NYSE: CTL) saw a corresponding increase in ROE last year. But given the hit to earnings that merger-related restructuring charges caused, I expect Frontier to recover much of that lost ROE over time.
A Foolish takeaway
As I see it, Frontier should eventually benefit strongly from its acquisition of Verizon's landline assets. With trailing annual operating cash flow in its most recent quarterly report having more than doubled from year-ago levels, I remain confident that once Frontier fully integrates its new purchase, profits should follow suit. That will bode well for investors looking for strong long-term returns.
