Frontier Communications stock got a lift Monday after J.P. Morgan media and telecom analyst Phil Cusick initiated coverage on the company with an “overweight” rating and a $40 per share year-end price target, pointing to his belief that its fiber network push could lead to big upside.
Frontier emerged from bankruptcy in April 2021 and since then has begun an aggressive push to build its fiber network out to more than 10 million homes by the end of 2025. In his report, Cusick wrote that the company had already built fiber to about 3.8 million homes in its footprint.
Cusick estimated that Frontier could grow its broadband subscribers by 32% to about 3.6 million by 2025, but also noted it won’t be easy.
“We are encouraged by Frontier’s reinvigorated focus to rapidly deploy fiber and improved capital structure post-bankruptcy, but acknowledge building and selling fiber in an increasingly competitive broadband ecosystem remains a key risk,” he wrote.
As a result, Frontier stock was up as much as 10% on Monday ($2.57 each) to $28.61 per share, before closing at $28.17, up 8.8%. The stock was down slightly (0.5% in early trading February 8 to $28.03 each.
But Cusick sees huge potential in Frontier’s predominantly rural market, which has been severely underserved by fiber and is the focus of federal programs to boost broadband availability. While Frontier has offered fiber in the past to some of its customers, most of its high-speed subscribers have received service via copper-wire based digital subscriber line (DSL) offerings. It is Frontier’s intention to replace DSL with fiber throughout its footprint.
That replacement strategy should lead to deeper penetration of service and lower cost over time. Historically, Frontier’s penetration rates for DSL were low because of slower speeds. With fiber, those take rates are expected to climb, Cusick wrote, adding that the pandemic has accelerated consumer need for broadband at reliable speeds.
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In his note, Cusick wrote that Frontier’s main competition is cable, but believes over time the telco could achieve broadband penetration rates in the mid-to-high teens percentages in the first two years, and more than 40% over time.
But Frontier’s ultimate broadband penetration could be even higher, given that other telcos that have expanded their fiber networks have reported rates as high as 30%.
“At the same time, we could see improved trends within Frontier’s base fiber cohort as Frontier improves go-to-market and promotional strategies,” Cusick wrote.
The big question is what will Frontier do with its markets outside of the 10-million base after 2025. Cusick estimates that there are about 5 million homes outside of the initial buildout, many in remote areas where it is cost-prohibitive to extend fiber. The analyst said the company could either build out those areas with the help of federal funding, or sell them to a third party.
“Both are possible, as the prospect of Federal support could increase the value of the properties,” Cusick wrote, adding that Frontier management is likely to outline its plans for those areas by mid-year. He estimated those markets would be worth about $2 billion if the company decides to sell. ■
