Value Screen: FairPoint Communications Inc. (FRP)

On January 16, Verizon (VZ) announced it is selling its residential telephone business in Maine, New Hampshire, and Vermont for $2.72 billion. This operation, which serves 1.5 million customers, will be acquired by FairPoint Communications (FRP). FairPoint already owns local phone networks in 31 mostly rural markets in 18 states. The Verizon operations being sold will first be transferred to a newly created unit that will issue $1.7 billion worth of new debt before being sold to FairPoint. Of the $2.72 billion being paid by FairPoint, Verizon will receive $1.7 billion and Verizon shareholders will receive 1 share of FRP stock for each 55 shares of VZ they own. Verizon shareholders will have to decide whether to sell the new FRP shares, keep them, or perhaps buy more. I am applying my value screen to FairPoint, as things stand before completion of the transaction, to facilitate that decision.

Does the stock’s dividend yield exceed the yield of the S&P 500? Yes – the current yield is very high, 8.17%.
Is the stock’s beta less than or equal to 1.00? Insufficient data for three year beta. 1.14 per Yahoo Finance, 1.00 per Google Finance.
Has the stock’s performance equaled or exceeded the performance of the S&P? No.
Is the size of firm over 1 billion market capitalization? No, as things stand now: 672M.
Price to earnings analysis – is the current P/E ratio below 20? Yes, barely; 19.06
Price to assets analysis – is the P/B ratio below 2.5? No – 2.87.
Is the current ratio greater than 2.0? No: 1.37.
Is the dividend payout ratio less than 50%? No – 158%.
Earnings stability – has there been positive net income for the prior ten years? No. The company has lost money in six of the nine years for which data is available.
Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes, but the earnings history is too erratic to call this a trend.
Dividend growth – is the dividend greater than five years ago, preferably at least 1/3 greater? A dividend of 1.42 was instituted in 2005 and it has recently been increased to 1.59. This appears to be quite a bold move, considering that diluted earnings per share were .91 in 2005 and about 1.01 in 2006.
Is the business simple and understandable? Yes.
Does the business have favorable long term prospects? Not really. VZ is getting out of the landline business because of its low growth potential. FRP claims they can achieve growth by increasing broadband availability in rural areas, but it is hard to visualize FairPoint succeeding since a much larger and better capitalized firm has determined it would not be cost-effective.
Are company insiders buying more stock than they are selling? The CFO bought 20K shares from Nov. 05 to Feb. 06 and the stock has in fact doubled since then. There have been no subsequent purchases or sales.
Does technical analysis reveal a convincing uptrend? FRP has been in an uptrend for about a year.

SUMMARY:
The takeover of Verizon’s northern New England residential telephone business by FairPoint reminds me of one of those public television nature shows where you see a tiny lizard trying to swallow an insect three times its size. FairPoint says it plans to invest $200 million on infrastructure improvements and systems development in this area, with half of that that amount being spent “even before we close the transaction,” according to Gene Johnson, chairman and CEO. Johnson also says he plans to keep all 3000 Verizon employees, add 600 new workers, and significantly increase broadband internet availability in the region within 12 months after the deal closes. I am skeptical that FairPoint has the financial strength to do any of this, and I do not think FairPoint will be well received by regulatory authorities in the service area, not to mention unionized Verizon employees. My conclusion is that owning FRP shares is, at best, a very risky speculation, and I will be looking to sell mine soon after they are issued.

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6 Responses to “Value Screen: FairPoint Communications Inc. (FRP)”

  1. Christopher Gowen Says:

    Great blog

  2. Maximus Says:

    I would like to see a continuation of the topic

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