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Analyst Blog

On Dec 24, we maintained our Neutral recommendation on Frontier Communications Inc. (FTR - Analyst Report). We believe new product deployments, broadband expansion and cash flow management by reducing operating expenses would remain accretive to the company’s growth. However, backhaul revenue pressure, increased cost on initiatives, competitive threats in the telecommunication market, as well as higher financial leverage would continue to weigh on the company‘s earnings. This communications company holds a Zacks Rank #3 (Hold).

Why Maintained?

The company continues to offer bundled services, which include High-Speed Internet (HSI), unlimited long distance calling, enhanced telephony features, and video offerings along with attractive packages of value-added services to local access line customers. The recent rise in cable tariffs has made Frontier’s service even more competitive. Frontier remains focused on new product development including Hughes Satellite Broadband, Residential VoIP and Commercial Data Products.

Meanwhile, the company expects the backhaul transformation to be completed in the first half of 2014 and provide a stable revenue stream. Further, the company has made significant development in its Ethernet to wireless tower builds and expects it to be completed in the fourth quarter. The company now intends to add capacity to its high end Ethernet services, which will allow it to charge higher prices and in turn boost revenues.

However, loss of legacy fixed telephony business to wireless and other offerings continue to affect the company. The company’s local and long distance service revenues dropped during the quarter as more users migrated from the traditional landline service. Expected decline in wireless backhaul revenues during the first half of 2014 is another near-term concern for Frontier.

For 2013, the company is expected to see higher operating expenses related to increase in employee cost and expenses associated with product launches, which could affect margins. Frontier is also considerably challenged by slow economic recovery in its service territories, which impedes growth prospects.

Other Stocks

Companies operating within the telecommunication sector that are worth taking note of include Hawaiian Telcom Holdco Inc. (HCOM - Snapshot Report), Chungwa Telecom Company Limited (CHT - Analyst Report) and Consolidated Communications Holdings Inc. (CNSL - Snapshot Report). HCOM carries a Zacks Rank #1 (Strong Buy), while CHT and CNSL stocks currently carry a Zacks Rank #2 (Buy).

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