Analysts from New Street Research and MoffettNathanson offered very different views of Frontier Communications’ future prospects, initiating coverage as the company emerges from bankruptcy.
During an investor event on Monday, New Street Research analyst Jonathan Chaplin characterized Frontier’s situation as “undoubtedly the most exciting equity story in the sector,” noting it has “all the hallmarks of assets that we tend to love – infrastructure, growing market, attractive market structure, high barriers to entry, massive share gain opportunity, operating and financial leverage.” He added the difference between Frontier and other similar players is that Frontier’s fiber penetration is currently “in the teens” as opposed to in the mid-40% range.
Analysts at MoffettNathanson offered a more tempered view of Frontier’s future potential.
“We wouldn’t call Frontier a diamond in the rough. Instead, it’s more of a semi-precious stone in the rough,” they wrote in a research note. Though the company has “clear opportunities” to boost performance, they noted increasing the share of revenue that comes from its consumer FTTH broadband business (as opposed to its commercial segment) to “substantial levels will take many years.” For Frontier, “success would be defined as achieving stability or modest growth rather than meaningful growth.”
Frontier filed for bankruptcy in April 2019. Last week, the California Public Utilities Commission approved its restructuring plan, handing the company the last approval needed to emerge from protected status after two years in limbo. Chaplin tipped this to occur around April 30.
The company currently serves around 14 million homes with broadband, with about three million of these passed with fiber and the remainder served with copper. Last year, the company outlined plans to upgrade an initial tranche of three million copper locations to fiber as part of its restructuring effort, noting it could eventually upgrade as many as nine million through two additional waves of three million each. It also said it would pursue fiber-to-the-tower (FTTT) and small cell opportunities to boost the commercial side of its business.
Chaplin said New Street’s analysis supports the investment case for fiber to eight million homes, noting Frontier could create $20 billion in net value from these. He added “we think these returns are actually dependable with effective execution,” which it now has a better chance of achieving with former Verizon, Vodafone UK and AT&T executives at the helm.
“The path has been laid for them. There’s nothing they’re doing that hasn’t been done before, and, I’ll say it again, by this management team before,” he said. “They’ve managed to attract leaders who have done exactly this in other contexts before.”
Specifically, he noted executive chairman John Stratton built Frontier’s existing fiber footprint back when it was owned by Verizon, while new CEO Nick Jeffrey helped lead Vodafone UK’s turnaround. Veronica Bloodworth, who was appointed chief network officer last week, has been “transforming copper lines to fiber at a pace of three million a year or more at AT&T for the last several years,” Chaplin said.
MoffettNathanson analysts, however, argued the company still faces significant hurdles, adding “management has a lot of wood to chop.”
Frontier will face competition from cable competitors “essentially everywhere” it deploys fiber, they wrote. “The cable operators currently enjoy significant share in markets like those that Frontier plans to upgrade and won’t give it up without a fight.”
MoffettNathanson also pointed out Frontier faces an uphill battle when it comes to its reputation with customers, highlighting dismal ratings across the board for its internet, telephone and TV services in the American Consumer Satisfaction Index.
And while FTTT investments would likely come out “solidly in the black,” MoffettNathanson’s analysts noted that on small cells Frontier would be starting “a step (or two, or three) behind” communications infrastructure incumbents like Crown Castle. They concluded they “wouldn’t be surprised if the planned small cell push never gains traction.”