Zacks_Analysts' Blog : Frontier Fixed at Neutral - Analyst Blog

We are maintaining our long-term Neutral rating on Frontier Communications Corp. (FTR) following its first quarter results.

Frontier’s earnings were at par with the Zacks Consensus Estimate in the first quarter, but deteriorated from the year-ago level. However, revenue more than doubled on the back of West Virginiaoperations acquired from Verizon Communications’ (VZ) fixed-line business.

Frontier’s high-speed Internet and satellite TV subscriber bases are expanding on aggressive bundled service offerings and promotional initiatives. The company focuses on generating new revenues through customer retention and growth, business wins, new product deployments, as well as management of profitability and cash flow through decreased operating expenses and capital expenditures.

Frontier remains committed to generate EBITDA margins of 50% by the end of 2012. The company is expected to ramp up its broadband capability and convert its newly acquired rural fixed-line from Verizon into its own systems in the remaining 13 states.

The conversion of 4 states –– Indiana, Michigan, North Carolina and South Carolina –– are expected to be completed by the fourth quarter of 2011 and the remaining 9 states by the end of 2012. These conversions are expected to boost earnings and provide cost synergies of approximately $550 million by the end of next year.

Moreover, Frontier is strengthening its balance sheet and focusing on the sustainability of annual dividend to its shareholders. At the end of March 31, 2011, the company’s leverage (net debt to adjusted operating cash flow) stood at 3.03 times.

Frontier is trying to reduce its leverage to 2.5 times through a combination of EBITDA improvements and debt reductions. However, the company currently has a highly leveraged balance sheet with approximately $8 billion in long-term debt.

We believe Frontier’s ongoing expansion efforts primarily related to broadband network infrastructure expansion may continue to stretch borrowing initiatives and the balance sheet. In addition, Frontier faces integration risks in converting the acquired Verizon properties to its own system over the next couple of years.

Further, intense competition and regulatory pressure add to our worries. All these factors might limit earnings potential in the upcoming quarters.

Hence, our long-term rating is supported by the Zacks #3 Rank (Hold).