Frontier Communications won't be able to sidestep all of the supply chain constraints that have gripped the telecom industry, but access to both materials and labor should improve significantly by the time the telco's big fiber-to-the-premises (FTTP) upgrades are in full swing, says an industry analyst who remains bullish on Frontier's future.
"Certain components of the FTTH [fiber-to-the-home] supply chain are tight today, and this introduces some risk to Frontier's deployment plans," Nick Del Deo, analyst with MoffettNathanson, said in a recently issued report that updates the firm's model for the company based on Frontier's latest network modernization plan. "However, over time, we suspect that the markets for materials and labor will respond to the shift in demand, particularly by the time the company reaches its peak deployment cadence in 2023-2025."
Del Deo notes that fiber manufacturers are currently expanding production capacity and expects labor to respond to "market signals" that portend ramped-up fiber network deployments.
While supply chain constraints have touched most players across the telecom industry, the issue took on a more serious posture earlier this month when AT&T warned that it would have to scale back some of its FTTP plans for 2021 – from about 3 million homes passed to about 2.5 million – in part due to hiccups in the supply of fiber.
"The supply chain is clearly a risk we need to monitor for Frontier and others, but we think an assessment of the risk needs to be more nuanced than what AT&T suggested, for several reasons," Del Deo wrote. But Frontier, he added, bumped up its 2021 target by about 100,000 homes and is not currently experiencing or expecting supply chain issues.
Against that backdrop, the analyst continued to rate Frontier with a "Buy" rating paired with an increased target price – moving from $31 to $34. Shares in Frontier, which has been trading on the Nasdaq under the "FYBR" ticker since emerging from Chapter 11 bankruptcy in late April, closed Monday at $28.83, down 69 cents (-2.34%) for the day.
That price target update came to light a couple of weeks after Frontier announced an accelerated FTTP network upgrade and buildout plan that will see the company pass about 10 million locations with fiber by 2025. To get there, Frontier expects to end 2021 with 4 million FTTP passings and tack on another 6 million under a revised, multi-year "Wave 2" plan.
If all goes to plan, about two-thirds of Frontier's broadband footprint will be served by fiber by 2025. In an earlier report, Del Deo noted that the final third of the footprint is in somewhat of a holding pattern, speculating that Frontier could end up pursuing similar upgrades on its own, move forward in some areas with government assistance or even divest or swap some of those assets.
Frontier noted on its recent analyst day that the upgrade program is funded through early 2023, but it acknowledged it will need additional financing for Wave 2.
Del Deo said Frontier could try to bridge the gap by issuing equity into the public market, selling equity to a strategic partner, issuing preferred equity, or perhaps selling some properties that aren't yet part of the current upgrade plan.
Del Deo expects Frontier's revenue to stabilize in the 2023-2024 timeframe and "grow noticeably in the years that follow, as the newly upgraded systems move up their penetration curves and start to contribute to overall results."
— Jeff Baumgartner, Senior Editor, Light Reading