Despite Bargain Price, Hold Off on Frontier

Despite gloomy guidance, we continue to believe that the competitive strength of the firm mostly rests in its fixed-line assets, including the acquired fiber assets that were well maintained by Verizon. We are maintaining our narrow moat rating, reflecting our belief that if Frontier could sail past recent self-inflicted troubles, it could draw on its network assets to regain market share. We plan to reduce our fair value estimate to $5 a share, from $5.50, while raising uncertainty rating to very high from high. Despite trading in four-star territory, we believe there is significant risk to Frontier’s business that could create further downside in the shares, and we would wait for an even wider margin of safety before investing.

During the quarter, total revenue declined 5% sequentially, while the legacy Frontier operations declined by 9% year over year, excluding acquisitions. The firm lost 133,000 DSL Internet access connections, 107,000 video connections, and 182,000 residential phonelines, all on par with or worse than recent experiences. By our estimates, the firm saw its household penetration decline by 2 to 3 percentage points over three quarters, quite a steep pace in the residential business. The firm did not fare any better with business accounts as it suffered a loss of 14,000 business customers.

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