One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Frontier Communications Corp (NASDAQ:FTR) fits the bill.
The quest for perfection Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
With those factors in mind, let's take a closer look at Frontier Communications.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-year annual revenue growth > 15%||18%||Pass|
|1-year revenue growth > 12%||(4.8%)||Fail|
|Margins||Gross margin > 35%||90.8%||Pass|
|Net margin > 15%||3%||Fail|
|Balance sheet||Debt to equity < 50%||205.7%||Fail|
|Current ratio > 1.3||1.40||Pass|
|Opportunities||Return on equity > 15%||3.7%||Fail|
|Valuation||Normalized P/E < 20||16.89||Pass|
|Dividends||Current yield > 2%||8.9%||Pass|
|5-year dividend growth > 10%||(13.4%)||Fail|
|Total score||5 out of 10|
Since we looked at Frontier Communications last year, the company has held onto the point it gained from 2011 to 2012. But revenue contracted even as Frontier's current ratio improved, and the share price has fallen by about another 10% over the past year.
Frontier investors face a big dilemma. On one hand, the stock's dividend yield is truly impressive. Yet at its core, much of Frontier's revenue comes from a failing rural landline business, and despite efforts to try to push customers into higher-margin, more modern services like broadband, Frontier's falling sales point to a lack of complete success on that score.
Moreover, Frontier's competitors have taken better steps toward building a sustainable business. Windstream Corporation (NASDAQ:WIN) has a high enough dividend yield to raise some of the same concerns as Frontier, but Windstream has managed to grow its revenue and has an arguably stronger strategy for diversifying into more profitable service offerings. CenturyLink, Inc. (NYSE:CTL) has taken a big step toward making a bigger footprint in the cloud computing space, with its 2011 acquisition of SAVVIS giving it exposure that it never had before to the cloud.
Frontier recently decided to take the somewhat odd step of providing electricity and natural gas in Ohio. The move admittedly gives it diversification, but in a direction that seems to take it away from its core competency.