Better Buy: Verizon Communications Inc. vs. Frontier Communications
In some ways, Verizon Communications (NYSE: VZ) and Frontier Communications (NASDAQ: FTR) are both beleaguered stocks. The two companies face challenges to their business model and both operate in markets where disruptive competitors threaten their customer base.
While Frontier and Verizon have much in common, one is clearly healthier than the other. Frontier is struggling for its very existence while Verizon is struggling to be as successful as it has been for years.
The case for Verizon
Verizon has been adding customers each quarter in its wireless business and it remains profitable. In its most-recent quarter, the company delivered earnings per share of $0.89, the same as it produced the year before.
That's not to say it's all clear sailing ahead. The wireless business has changed and Verizon no longer enjoys the same advantages it once had. It has had to fend off T-Mobile (NASDAQ: TMUS), which has forced it to lower prices, drop data overages, and offer unlimited plans. In addition, Verizon can no longer claim a major advantage when it comes to network quality.
Verizon may still have the best network (one of two major studies ranks it on top), but it no longer has the huge lead it once did. That has opened a door for T-Mobile to go after Verizon's customer base. It also forces the company to be more aggressive with pricing when it comes to retaining its customers or adding new ones. Those are trends that will only continue.
In addition, while it's not as important as its wireless business, Verizon also faces challenges on the cable and broadband side. It has been slowly losing pay-television subscribers due to cord-cutting and it has also posted broadband losses. That's in line with industry trends where the cable business is shrinking and customers are opting for cable-based broadband over telephone company-based service.
The case for Frontier
Frontier has been a steadily declining company since it purchased Verizon's wireline business in California, Texas, and Florida. That purchase, which was made to give the company the scale it needed to compete with larger rivals, cost it $10.54 billion. In exchange, Frontier got approximately 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million cable subscribers.
Unfortunately, that deal closed in April 2016 and Frontier has lost subscribers in every quarter since.
Frontier has succeeded in cutting $1 billion in expenses with plans to cut another $350 million. The problem is that those cuts don't change industry trends. The company faces the same issues Verizon does. The cable business is shrinking and telephone-based carriers aren't covering the losses with broadband gains.
Which is a better buy?
While both companies face challenges, the impact of those struggles is very different. Verizon faces long-term growth concerns while Frontier faces near-term survival issues. One is a business that has to deal with maintaining its previous level of profits while the other has to find a path to breakeven, then figure out how to pay back billions in debt.
Verizon is a better buy simply because it's better to own a piece of a company that may struggle than a piece of one that's likely to go bankrupt. Neither of these stocks has a needle pointing clearly upward, but Verizon remains profitable and strong. It may have serious issues to deal with -- specifically changing customer needs and a strong challenge from T-Mobile -- but it has more than enough runway to figure out how to deal with those.
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Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.