On Monday, Citi adjusted its stance on Frontier Communications (OTC:FTRCQ) (NASDAQ:FYBR), moving from a Buy rating to Neutral, despite raising the price target to $38.50 from the previous $35.00. The reevaluation is primarily influenced by the perceived limited upside potential following the terms of the Verizon deal, which was made public on September 5th.
Citi's analysis suggests that the market has already priced in a high likelihood of the Verizon deal concluding under the current terms, with an estimated 86% probability reflected in the current market price. The firm's valuation scenario analysis places an even higher probability for the deal's closure at about 95%.
The increased price target to $38.50 is based on a probability-weighted scenario analysis, accounting for a 95% chance of the Verizon deal terms being met and a 5% reflection of the firm's fundamental valuation of Frontier Communications. This valuation also includes a rounding to the nearest 50 cents, aligning the target price with the deal price.
Citi has also expressed that there is a very low probability of a competing bid emerging for Frontier Communications. Despite the downgrade, the firm maintains that its fundamental outlook for Frontier Communications remains unchanged. The adjustment in rating and price target is a strategic response to the current market pricing and the anticipated completion of the Verizon transaction.
In other recent news, Frontier Communications has been the subject of significant developments. The company has been downgraded from Buy to Hold by analysts at TD Cowen and MoffettNathanson, following the announcement of Verizon Communications Inc (NYSE:VZ).'s plans to acquire Frontier. The acquisition, set at a purchase price of $38.50 per share, is expected to close in 18 months subject to regulatory approval and a Frontier shareholder vote. This acquisition is anticipated to bolster Verizon's broadband footprint.
Simultaneously, Frontier has secured over $23 million in grants to expand high-speed fiber broadband service in California's San Bernardino and Riverside counties. This initiative aligns with the state's 'Broadband For All' initiative, aiming to enhance internet connectivity in unserved and underserved communities.
On the financial front, Frontier reported a 2% revenue increase, hitting $1.48 billion, and a 5% growth in EBITDA during its Q2 2024 earnings call. Despite a net loss of $123 million, the company's operational cash flow remained robust at $374 million.
InvestingPro Insights
Recent InvestingPro data provides additional context to Citi's analysis of Frontier Communications (NASDAQ:FYBR). The company's market capitalization stands at $8.78 billion, reflecting the market's current valuation in light of the potential Verizon deal.
InvestingPro Tips highlight some challenges facing FYBR. The company "operates with a significant debt burden" and "short term obligations exceed liquid assets," which could explain why Citi is cautious about overvaluing the stock beyond the deal's terms. Additionally, FYBR is "not profitable over the last twelve months," with a negative P/E ratio of -211.4, supporting Citi's focus on the Verizon deal as a key value driver rather than current fundamentals.
However, it's worth noting that FYBR has shown a "strong return over the last three months" and a "large price uptick over the last six months," with a 47.67% price total return over the past six months. This aligns with Citi's observation that the market has already priced in a high probability of the Verizon deal's success.
For investors seeking a more comprehensive analysis, InvestingPro offers 5 additional tips for FYBR, providing a deeper understanding of the company's financial position and market performance.
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