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Is Frontier Airlines A Good Investment?

Is Frontier Airlines A Good Investment

Summary

Frontier appears undervalued but upon further inspection the discount is due to concerns regarding the stability of the business.

Bears are overstating the debt overhang as Frontier will be able to refinance these with secured debt.

Bulls are understating revenue concerns as many segments continue to decline by double-digit rates.

Frontier produces enough cash flow to fund the dividends but there almost nothing left for deleveraging.

Thesis

While I believe that bears are severely overstating the risks associated with Frontier’s (FTR) debt, they seem to have other valid points. Revenues continue to decline by double-digit rates, a key strategic initiative started barely one year ago, is now declining by 20%. Lastly, even though free cash flow appears to more than cover the dividend, there is barely anything left for deleveraging. This means that the equity will remain under water, which means that there is little to no hope of any capital appreciation.

Introduction

Frontier Communications is a very interesting investment candidate. As with all turn arounds, there is a lot going on. But the basic premise is as with any turnaround: high reward if the turnaround works. As Warren Buffett famously set:

“In my experience [..] turnarounds seldom turn.”

Speaking from my own experience, I can attest to that statement. I also had the fortune of becoming proficient in finance and accounting before I actually started investing. This allowed me to avoid many market lessons paid for in the form of lost capital. In other words, I already knew that I should always be skeptical of turnarounds.

But my experience also has implored me to add a little nuance to Buffett’s quote. Turnarounds seldom turn, but they don’t always need to turn. At least not fully. Before I move on, I’d like to provide a general summary of the thesis as I believe most longs see it. After that, I’ll opine in a more critical manner. What will be left is a yay or nay for Frontier.

General summary of bull thesis

Frontier appears to be undervalued based on an EBITDA multiple approach. Additionally, concerns about declining revenues are vastly over exaggerated. It will take some time, but the company will definitely manage to stabilize its revenue. This, in turn, will allow the company to comfortably pay down its debt.

Read More: seekingalpha.com

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