Better Buy: Frontier Communications vs. AT&T

12/13/19

By Daniel B. Kline, MotleyFool

AT&T (NYSE:T) faces some major business problems. Cord-cutting has hit the company especially hard, and its DirecTV division has been losing customers at an alarming rate.

Despite that, the company's problems are essentially a paper cut compared to the multiple grievous wounds inflicted upon Frontier Communications (NASDAQ:FTR). AT&T has issues to solve, but Frontier has to figure out how to survive -- a battle it's not likely to win.

A remote control is pointed at a TV.

BOTH FRONTIER AND AT&T ARE LOSING CABLE CUSTOMERS. IMAGE SOURCE: GETTY IMAGES.

What is AT&T facing?

AT&T remains a profitable company even as its pay-television business struggles. DirecTV has lost about 2.5 million subscribers in 2019 alone, following a 2018 that saw the satellite television company drop 1.23 million paying customers, according to data from Leichtman Research Group.

Those are alarming numbers that show that the company's $48.5 billion deal to buy the satellite company is going to turn out to be an epic failure. That's bad news for shareholders, but the company has more than enough successful assets to overcome its pay-television problems. CEO Randall Stephenson explained the company's growth plan in AT&T's third-quarter earnings release.

"Our 3-year plan delivers both substantial and consistent financial improvements over the next 3 years," he said. "We grow revenues, EBITDA, and EPS every single year, and free cash flow is stable next year, but then grows in both of the next two years, as well. And all of this is inclusive of our investment in HBO Max."

Where does Frontier stand?

For AT&T, DirecTV was a failed big bet that it can recover from. Frontier Communications made a similar bet when it spent $10.5 billion buying Verizon's wireline business in California, Texas, and Florida. That deal made sense at the time it was made in April 2016.

When Frontier purchased the Verizon properties it was making a bold bid to go from being a minor player to a major one. The purchase doubled the size of the company's subscriber base and allowed it to lower its overall operating costs by over $1 billion a year due to synergies created by the deal.

The problem for Frontier is that its purchase of these customers coincided with the acceleration of cord-cutting. Since the CTF purchase, the cable company has lost subscribers in every quarter. That's not a situation that's likely to turn around, and it's one that has put Frontier into survival mode.

Former CEO Daniel McCarthy, who was replaced after the company reported Q3 results, has generally tried to put a positive spin on the company's numbers. His remarks showed that the company has very little good news to share.

"Third-quarter results reflect our ongoing commitment to investing in our assets that have the strongest potential for future growth, while actively managing the parts of the business that are experiencing secular decline," he said. "Third quarter adjusted EBITDA of $804 million reflects a sequential decline in revenue, an increase in accounts receivable reserves, and increased adjusted operating expenses."

AT&T is clearly a better buy

DirecTV has been a spectacular mistake for AT&T, but the company had the cash to survive, and even thrive, despite that bad decision. Frontier Communications went all-in on its big purchase, with no contingency plan for its failure.

AT&T faces an embarrassing writedown on its investment in satellite TV. Frontier faces a slow death that's nearly inevitable. As an investor, there's no reason to buy shares of a company that's essentially on life support. Frontier won't be turning things around, and the only hope it really has is that another player wants to purchase its declining assets before it runs out of money.

For AT&T, the future remains bright. The company makes money and has shown growth in areas outside of pay-TV that can more than cover for the DirecTV debacle. It's not a company without flaws, but compared to Frontier AT&T is a stellar investment.

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