UPDATE: Frontier (FTR) 'Oversold', Morgan Stanley Upgrades Two Notches to Overweight

(Updated - May 27, 2015 10:30 AM EDT)

Morgan Stanley upgraded Frontier Communications (NASDAQ: FTR) from Underweight to Overweight with a price target of $6.00 (from $7.00). Analyst Simon Flannery noted the stock suffered due to pending financing for Verizon wireline assets, and he see attractive valuation following the recent sell-off, with potential return of 30%. Flannery also noted that, given recent underperformance, its dividend yield is higher than its peers.

"While our long term reservations about the wireline business model remain, we believe the stock is oversold at current levels," said Flannery. "Frontier’s stock has fallen some 26% this year, is off more than 40% from recent highs and now yields 8.5%, the highest of the major RLECs we cover. The stock is trading on a 2017 pro-forma FCF yield of 17% assuming equity issuance for Verizon lines at the current stock price, well above the wireline average of 8% (RLECs 9%+)."

Flannery continued, "Frontier’s business has faced significant pressures in recent quarters, particularly related to the integration of the Connecticut lines. We believe this should stabilize in coming quarters with improved pricing trends, potential CAF Phase II funding, easing backhaul pressures and potential bonus depreciation extensions."

The analyst added, "We believe the current dividend is sustainable in the medium term, and sustainability should be enhanced by the Verizon transaction. The 42 cent annual dividend represents 55% of estimated 2015 free cash flow before integration costs, and just 50% of pro-forma 2017 estimated free cash flow. Management guided to a 13% payout ratio improvement from the Verizon deal (from 50% in 2014), so there could be further upside to our estimates. A successful start to the Verizon lines financing program in coming months should improve visibility surrounding the Verizon deal accretion."

For an analyst ratings summary and ratings history on Frontier Communications click here. For more ratings news on Frontier Communications click here.

Shares of Frontier Communications closed at $4.92 yesterday.

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