If you buy a brand new Porsche, you're paying a premium for a top-tier driving experience. Purchase a broken-down 1974 AMC Gremlin and you have the opposite -- a vehicle that wasn't great when it was new that's already seen its best days.
Verizon (VZ -0.10%) may not quite be analogous to a new Porsche, but it would be a pretty nice car in very good condition. It's also perhaps a little unfair to compare Frontier Communications (FTR) to a Gremlin -- though only because with enough love, a good mechanic, and some spare parts, the Gremlin might once again turn into suitable transportation.
Cord cutting has impacted both Frontier and Verizon. image source: Getty Images.
What's wrong with Frontier?
You can sometimes argue that a beleaguered stock is a good value because it has so much growth potential. That's not the case with Frontier: The cable company has been in steady decline since April 2016, when it spent $10.54 billion buying Verizon's wireline business in California, Texas, and Florida.
At the time that seemed like a smart purchase. Frontier bought approximately 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million FiOS video subscribers. That was a play for expansion so it could spread its costs across more customers.
That worked to a point. The company managed to cut over $1 billion in expenses, and it expects it will be able to cut more. The problem is that in every quarter since the CTF deal closed, Frontier has lost customers. That's largely driven by cord cutting, which has increased steadily since 2013.
Many cable companies are making up for their pay-television losses by adding internet customers. That has not been true for Frontier, which lost 333,000 internet customers in 2017 and another 43,000 in the first quarter of 2018, largely because its phone line-based technology is not what consumers are looking for.
| Year | Pay TV gains/losses | Internet gains |
|---|---|---|
| 2012 | 170,000 | 2,000,000 |
| 2013 | -105,000 | 2,600,000 |
| 2014 | -125,000 | 3,000,000 |
| 2015 | -385,000 | 3,100,000 |
| 2016 | -795,000 | 2,700,000 |
| 2017 | -1,495,000 | 2,100,000 |
Data source: Leichtman Research Group.
Why is Verizon a buy?
Verizon has shown resilience in its cable and broadband businesses. The company only lost 75,000 cable customers in 2017 and another 22,000 in Q1 of 2018. The company lost 79,000 broadband customers in 2017, but added back 7,000 in Q1 2018.
Those losses are minor compared to the major gains the company has made in its wireless business. After adding 260,000 retail postpaid net wireless customers in Q1, the company more than doubled that in Q2, adding 531,000 new wireless connections.
Verizon has shown that it can manage its pay-TV and broadband businesses to minimize losses while posting major gains in its wireless business. That has been a steady pattern, and it's not likely to change even in a turbulent market.
The choice is success versus failure
Frontier's upside is survival. Its management has shown a strong ability to manage money, move financial obligations around, and find savings. What it has not been able to do is stop its customer loss. The company might be able to stabilize -- though that seems like a long shot -- but it's not going to put up significant growth.
Verizon has shown that it can grow its overall business despite the changes in pay television and broadband and low-price pressure from Sprint and T-Mobile in the wireless space. Those challenges won't be going away (and a merger between the two low-cost rivals may make them a stronger competitor). Verizon, however, has shown it can steadily grow, while Frontier has not even proven it will be able to remain a viable operating business.
