Accumulation By Jana Partners Of Frontier Communications Highlights Chronic Undervaluation: Analyst

Benchmark analyst Matthew Harrigan reiterated Frontier Communications Parent, Inc FYBR with a Buy and a $35 price target.

The re-rating follows the stock's positive reaction to the news of activist PE firm Jana Partners accumulating a new position and suggesting Frontier sell itself. 

The analyst said this is unlikely in the current equity and especially rate environment. However, it certainly highlights FYBR's chronic undervaluation as he said it would be difficult to muster a price that aligns with the value perception of the company's management and board. 

A further albatross is a sticky dent inflicted on telecom stocks by the high-profile lead pipe replacement concerns surfacing this summer. Frontier also has a unique potential offset buffer in 5 million incremental expansion locations beyond its 10 million sites committed to build. 

Further possible copper conversions with likely government subsidy benefits could confer as much as $15 potential upside not included in the price target. 

However, he readily admits this is not likely to get folded into a realized share price until later in the decade.

Frontier is the largest pure-play fiber provider in the U.S. Benchmark estimates it will rapidly increase fiber revenue share through the remainder of the decade. 

Benchmark estimates Frontier should generate over $3.0 billion in 2023 fiber top line, increasing 12%+ annually to more than $5.4 billion in 2028.

Highly innovative Dallas metro fiber securitization notes fully fund Frontier's fiber build and afford flexibility for further refinancings. 

The investment grade deal closing August 9 was the first funding transaction for a public U.S. company backed by FTTH assets, creating a new bankruptcy-remote special purpose vehicle to hold Frontier's fiber assets and associated company contracts in the Dallas metro area and associated customer contracts from existing and future residential and business customers. 

The transaction had an implied debt per passing of $3,380, and 80% of the notes were rated investment grade. Frontier entered into a complementary commitment for a $500 million variable rate funding facility with a delayed draw feature, subject to leverage tests and other customary drawing conditions.

Harrigan projects Q3 revenue of $1.43 billion vs. consensus $1.44 billion and EPS loss of $(0.13) vs. consensus loss of $(0.07).

Price Action: FYBR shares are trading higher by 3.23% at $18.55 on the last check Wednesday.