Fitch Ratings has lowered its outlook on Frontier Communication Corporations (FTR - Analyst Report) from stable to negative based on low revenue growth expectations in the next two to three years. Couple of months earlier, rating agency Standard and Poor (S&P) also lowered FTR’s corporate credit and senior unsecured debt ratings by one notch to BB-.
Fitch has argued that FTR’s revenue will remain under pressure mainly based on the falling business service and data revenue, which has registered a modest decline last year. The rating firm cited that there has not been any significant employment growth, which in turn has hurt the business service revenue.
In Jul 2010, Frontier Communications acquired Verizon Communications Inc.'s (VZ - Analyst Report) local wireline operations in 14 U.S. states. With the acquisitions, Frontier has taken control of over 4.8 million rural landline customers thus trebling in size to become the largest rural service provider in the United States.
Inspite of the acquisition, FTR’s legacy wireline business remains highly challenged based on competition from wireless and other competitive offerings like Time Warner Cable’s (TWC - Analyst Report) VOIP (voice over Internet protocol) service. To counter these problems the company has increased its sales force and has expanded its distribution channels, thus increasing the operating expenses.
Amidst these negativities there are some positive news for FTR, as the company’s existing residential customer churn has come down and the average revenue per residential customer has increased. Additionally, FTR had a strong free cash flow of $975.3 million at the end of 2012, which is relatively strong considering the high capital expenditure required to expand the broadband network.
However, Fitch is not confident of FTR’s debt position and expects a net debt to EBITDA ratio of 3.2 times in 2013, with a marginal improvement of 10 basis points in 2014. Fitch currently maintains a BB+ rating on FTR, which is one notch below the Junk category. Fitch has warned that if FTR’s net leverage to EBITDA ratio rose to 3.3 times or more in 2013, the company could face further rate cut.
Currently Frontier Communications Corp carries a Zacks Rank #3 (Hold).
Other Stock to Consider
Another related company in the telecom industry is Consolidated Communications Holdings Inc. (CNSL - Snapshot Report) and currently carries a Zacks Rank #3 (Hold).