LUMN - Citi cuts Consolidated Communications looking instead to Frontier

Citi has cut Consolidated Communications ( NASDAQ: CNSL ), noting some "premium valuation risk" in the stock despite some positive moves.

Analyst Michael Rollins likes the strategic direction the company's taking, and notes the company's in the early stages of a multi-year upgrade program for its fiber network - but after outperforming some of its peers, Consolidated is trading at a "meaningful" premium, he said.

CNSL stock is up 16% over the past three months, compared to rivals Frontier Communications ( NASDAQ: FYBR ), down 16% , and Lumen Technologies ( LUMN ), down 5% over that span.

Citi had previously recognized a risk that Consolidated might be taken private by its largest shareholder, Searchlight - but that was when the company was trading at a lower valuation, and now there's limited likelihood of a go-private offer at a meaningful premium.

The company needs about $480M in additional funding to wrap the fiber investment plan before future refinancing, Rollins noted, and new disclosures suggest it will consider securitizing its wireless investment stake, and optimize assets around strategic markets - which should meet most of its funding needs through 2026.

Meanwhile, consensus expectations for EBITDA look high by about 3%, Rollins said.

Instead, he's advocating a pair trade to look for outperformance by selling Consolidated and buying the weaker-performing Frontier ( FYBR ), especially given Frontier's opportunity to improve operations heading into 2023. FYBR is 0.5% higher Thursday afternoon.

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