Why Frontier Communications Corp. Got Hammered

By Markets Fool.com


Image source: Frontier Communications Corp.

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What happened

Telecom company Frontier Communications Corp. (NASDAQ: FTR) got hammered Wednesday, after the company released Q3 earnings after the market closed on Tuesday, including lower-than-expected sales and a widening loss. By the end of the day, the company's stock was down nearly 14%, making it the worst-performing stock in the S&P 500 for the day.

So what

For the third quarter, Frontier posted revenue down 3.2% from Q2, a GAAP loss per share of $0.12, and an adjusted net loss of $0.04. On the basis of the earnings report and forecasts, multiple firms downgraded their rating on the stock. One analyst at Wells Fargo cut the target price in half, from $9 to $4.25. The stock ended the day at $3.39.

Frontier's revenue instability comes from a declining new customer base, increasing churn of existing customers who are switching to other providers, and lower revenue per customer. Frontier's revenue, however, surged more than 70% year over year, partially thanks to a major acquisition in April of Verizon's wireline operations in California, Texas, and Florida -- but the company still posted lower-than-expected revenue from the deal and faces intensified competition from the likes of AT&T, Comcast, and others.

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Now what

Frontier Communications Corp. stock is now at a record low. While that may seem like a bargain for such a high-dividend stock that could be ripe for a turnaround, be careful. The company's dividend yield, which is over 10% for the trailing 12 months, is now being questioned for how sustainable it will be in the face of these kinds of results. The payout is very high compared to the market, and the company has already cut it twice in recent years. In an industry that's increasingly being squeezed by those with better mobile technology, Frontier looks like a stock that investors might want to pull the plug on.

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Seth McNew has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.