Frontier Communications/Smaller Telcos

[Packer16]

I was reviewing the merger data and found that at its current price FTR is a 20% FCFY stock with a 10% dividend.  This appears to be an interesting alternative to a bond other high yeilding stocks or a cigar but like USMO. 

 

Some other small telcos are interesting (esp. the ones with fibre rings where customers/services can be added on with a small investment).  These include SURW, HCTO and SHEN.  These remind me of the the "triple play" cable cos.  If you look at HCTO and VMED (a triple-play provider in UK) cap-ex levels or SURW's own maintenance cap-ex level adds an addtional $24m to $40m to FCF.  This reduces SURW's FCF multiples to 2.5x FCF.  An interesting play with some good upside.

 

Packer

[ubuy2wron]

Was this not a recent spin off from Verizon? Spin offs have been a lucrative area to look for value I would appreciate any other commentary you may have re this name. There are only so many 10Ks one can read and a heads up from this board is always appreciated.

[ExpectedValue]

Was this not a recent spin off from Verizon? Spin offs have been a lucrative area to look for value I would appreciate any other commentary you may have re this name. There are only so many 10Ks one can read and a heads up from this board is always appreciated.

 

Looks like Frontier has paid the same dividend amount for a while but that their FCF is trending down. Might be worth looking into to kind of model out the life of the business and how much cash can be returned to shareholders.

[biaggio]

I started to look at sec filings on FTR, as I would love to buy a 10+% yield with a 20% Free cash return.

 

It would appear that FTR merged with spinco. that owned a bunch of telephone lines that was spun out of Verizon.

 

http://sec.gov/Archives/edgar/data/20520/000119312510159347/d424b3.htm  (I am about half way reading this + following would be concerns/positives)

 

Positives:

 

FCF +

appears to have decent yield

Prem + Co have 4% position

 

Concerns:

 

i. "Our business has experienced declining access lines, switched access minutes of use, long distance revenues, federal and state subsidies and related revenues because of economic conditions, increasing competition, changing consumer behavior (such as wireless displacement of wireline use, e-mail use, instant messaging and increasing use of VOIP), technology changes and regulatory constraints...access lines declined 6% between March 31, 2009 and March 31, 2010, and declined 6% in 2009 and 7% in 2008 "

 

-i.e. declining business?

 

ii. "Verizon’s historical capital expenditures in connection with the Spinco business, excluding expenditures relating to Verizon’s fiber-to-the-home network (“FiOS”), have been significantly lower than our level of capital expenditures when compared on a per access line basis. Replacing or upgrading our infrastructure will require significant capital expenditures, including any expected or unexpected expenditures necessary to make replacements or upgrades to the existing infrastructure of the assets which formerly comprised the Spinco business."

 

-i.e. may require higher capex, resulting in lower  FCF

 

iii. "We and our industry will likely remain highly regulated"

 

iv. highly leveraged,

 

Ratio of earnings to fixed charges

       2010          2009          2008         2007         2006          2005          2004

  1.77x   1.64x   1.49x   1.76x   1.87x   2.13x   1.75x

For purposes of computing the ratio of earnings to fixed charges, earnings represent earnings from operations before income taxes plus interest ex

 

 

[biaggio]

Shares outstanding:987 million x $7.94 +$11.3 billion =~$19.24 billion enterprise debt

 

EBIT pro forma for 2009:~$1.4 billion

Net income after tax:$433 million

 

Depreciation + Amortization of $1.5 billion less estimated capital expenses of $700 million (about what it has been for last several years)

 

Owner's earnings of $1.233 billion

 

owner's earnings/EV=6.4% yield.-does not look cheap

 

Am i doing something wrong.

 

Packer were you looking at the same #'s

 

 

[ExpectedValue]

Packer is probably looking at levered free cash flow.

[Packer16]

The FCF numbers are on an equity basis and include $310 million in synergies.  Without synergies the FCF yield is 16%.  On an EV basis the FCF to enterprise yield is 14%.  This is FCF + Int Exp / (debt plus equity).  I think the combined debt will be closer to $7.8 billion.  See Investor Relations breifing (slides 18 & 19) on FTR site for the details.

 

Packer

[biaggio]

Thanks Packer + TariqAli

 

Reviewed presentation at http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Mzg1NzcyfENoaWxkSUQ9Mzg4MjQ1fFR5cGU9MQ==&t=1

-certainly makes me a lot more enthusiastic

 

versus

 

SEC filing to people issuing debt at http://sec.gov/Archives/edgar/data/20520/000119312510159347/d424b3.htm

 

if you look on page 29 of above sec filing it will have total long term debt which includes defered taxes + "other liabilities" of almost $3B. I am thinking these are real future payments. (?)

 

it is interesting the difference in tone of the "investor/shareholder presentation" vs the SEC filing

 

 

[biaggio]

For my own education:

 

FCF yield=FCF/market value=~16%, with ~ 12% dividend at current price...seems very appealing

 

-company going to provide broadband to rural areas where there is not a lot of competition.

 

-will they be able to increase prices? Probably

 

-will they be around in 10 years? Do they have an enduring competitive advantage? (I am thinking that it is unlikely that someone else will try to run the lines again or they will not be allowed to)

 

-Tangible book value of ~$9.5 billion ($1.2/9.5 billion=12.6% ROC---would indicate decent business?)

 

Why is it selling so cheap?

-level of leverage?

-perception by market that nobody will need there lines + switches ( I think they will be around, as the satellite, wireless companies need the competition)

-recent spinoff/merger so street is not up to speed on the value present

 

Anyone else have any other thoughts?

[Myth465]

I think its the debt. It looks like 1/1 debt to market cap. Makes one pause, but the cash flows are consistent and the story makes sense.

 

I see more and more people signing up for broadband, but wonder how they will service the debt and maintain the dividend. Its not a big worry but between debt, dividends, and expansion I think they will likely have to push out some of those maturities.

 

This seems like LNET, but with a dividend and some built in growth. Same story - Growth overtime as the economy recovers, and as debt is paid down IV grows. Plus 10% while you wait.

 

---

 

Thanks alot. I really like this idea, originally I just dismissed it but I like the focus on FCF and the simple story.

 

VIC also has a writeup - http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/32690

[Myth465]

I believe you have 2 major risks.

 

1 is the declining lines, you have to hope broadband compensates for the disconnections, and that eventually the disconnections slow or stop.

 

2 is integration risks. It looks like Verizon did this with another company which went bankrupt due to integration / performance issues. Frontier seems to have great management (they talk a good game and use the right verbiage). It also seems like Management has done this with a few companies.

 

---

 

It also seems to have alot of upside. If they can get Verizon to where they are (margins, and decline rate), then shareholders win big and get paid to wait.

If they bring Verizon online as is then we do quite well and get paid to wait.

If Verizon drags the whole ship down then everyone losses.

 

I dont know what will happen, but it seems like a good risk reward.

 

[Junto]

I believe you have 2 major risks.

 

1 is the declining lines, you have to hope broadband compensates for the disconnections, and that eventually the disconnections slow or stop.

 

2 is integration risks. It looks like Verizon did this with another company which went bankrupt due to integration / performance issues. Frontier seems to have great management (they talk a good game and use the right verbiage). It also seems like Management has done this with a few companies.

 

---

 

It also seems to have alot of upside. If they can get Verizon to where they are (margins, and decline rate), then shareholders win big and get paid to wait.

If they bring Verizon online as is then we do quite well and get paid to wait.

If Verizon drags the whole ship down then everyone losses.

 

I dont know what will happen, but it seems like a good risk reward.

 

 

leverage is a lot less if i remember correctly with Frontier compared to the Fairpoint transaction. I have family who are currently rolling up old line telcos and have found it very lucrative; although, along with integrations new revenue streams are constantly being looked at because of issue #1.

 

Long-term business models will change but near term cash flows remain strong...

[Myth465]

Thanks Parker, I bought FTR a bit ago. The Goldman presentation is very good and I think Management is very talented. The things they are focusing on should drop to the bottom line.

 

What do you think of LNET bonds. I think its a good move and would like for them to pay out 8 million in dividends. It would make it more FTR like, and would give those who are waiting a reason to stick around.

[Packer16]

I haven't been able to determine what the new bonds will sell for but an 8% yield is OK but lacks the upside (at least for me).  You may want to look @ the preferreds if they are available as they have a 10% dividend and are convertible.

 

Packer

[Shane]

Hello, sorry to bring up old questions.  I am really confused as to how you all are getting a 15%+ FCFY.

 

I went back to september and check out the price:

Market value of 7.4 billion.

 

FCF is CF from Operations - Capital Expenditures...  so in 2009 (How are you finding annual data for 2010?) I see them as having roughly 725 million (FCFhttp://finance.yahoo.com/q/cf?s=FTR&annual)

 

This comes out to less than 10% FCFY.  What am I doing wrong here?  Are you guys making adjustments to Operating cash flows?

[Myth465]

You have to combine it with Verizon. Frontier swallowed a business bigger then them. All old numbers are fairly useless. You can review the presentations and use the pro forma numbers.

[Nnejad]

You're not using a full year's worth of post-merger data.  If you include the acquisition for a full year, you get (off the top of my head)

 

about 2 billion in CFO, 750 million in cap. ex., and this doesn't inclcude 300 million in expected synergies.

 

1.2 to 1.5 billion in FCF.

 

Check the presentation in investor relations.