UNIT - Frontier Communications slides as Morgan Stanley cuts to Underweight on valuation

2023-03-27 10:49:25 ET

Frontier Communications ( NASDAQ: FYBR ) has slid 10% Monday following a downgrade to Underweight at Morgan Stanley, which points out a premium valuation to its telecom peers alongside some execution risks.

The stock has "significantly outperformed" wireline telecoms in recent weeks off the back of some solid guidance and a more favorable business mix, analyst Simon Flannery pointed out: Frontier stock had fallen just 7% so far in 2023 vs. sharper drops elsewhere (more than 50% for Lumen ( LUMN ), more than 40% for Uniti ( UNIT ) and Consolidated ( CNSL )).

That means Frontier is at a "significant" premium not only to wireline peers but also to AT&T and Verizon, which both sport dividend yields of 6%-plus.

Meanwhile, there are rising risks to the company's fiber growth targets as the company faces hotter competition from peers offering fixed wireless access: "We believe that FWA is poised to take significant share in rural and suburban markets while also pressuring industry [average revenues per user]," Flannery said, cutting Frontier's fiber build estimates to 1.3M per year and net adds to 309,000 and 388,000 for 2023 and 2024 respectively.

And that slower build pacing may mean pushing back free cash flow generation until 2027 "or beyond if the company looks to grow its Fiber build into expansion opportunities including BEAT and 1-2M additional copper locations," Flannery said.

He's cut the 12-month price target to $19, now implying a further 11% downside on top of Monday's decline.

Morgan Stanley's take is running counter to the rest of Wall Street, which has a Strong Buy on Frontier ( FYBR ) on average. Seeking Alpha authors rate the stock a Hold , while Seeking Alpha's Quant Ratings consider it a Buy .

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