These are tough times for many companies in the U.S. telecommunications industry. Problems such as shifting consumer demands, rapidly evolving technologies, and stiff competition for subscribers have caused businesses like Windstream Holdings to recently declare bankruptcy.
While they’ve not yet reached such a drastic level, telecom companies like CenturyLink [NYSE: CTL] and Frontier Communications [NASDAQ: FTR] have been struggling lately, trying to turn around their declining fortunes.
Concerns such as cord-cutting (customers canceling their pay TV subscriptions) and high debt levels make investing in CenturyLink and Frontier a risky proposal. What’s more, both companies have announced their interest in selling off parts of their business, putting their futures even more in doubt.
So are shares of CenturyLink and Frontier Communications [NASDAQ: FTR] worth buying as the companies try to come back from the brink, or should investors stay far away from these two stocks?
Pros and Cons of Investing in Telecom Operators
The U.S. telecom industry is a fraught landscape for many companies right now, as the rich get richer and others struggle just to survive.
On the other hand, many smaller and regional telecom operators are trying to regain their footing. This is especially true for companies that service residential and small business markets. Because there are dozens of options and competition is fierce, consumers are extremely price-sensitive.
The biggest challenge for telecom operators, now and in the future, is keeping up with customer demand for better connections and faster speeds. Keeping up with the latest technological developments requires a great deal of capital on hand in order to quickly launch new projects. However, rising debt and falling revenue makes this difficult for many telecom operators to achieve.
Is CenturyLink Stock a Buy?
CenturyLink [NYSE: CTL] currently has 450,000 global route miles of fiber-optic cables, allowing it to provide service to 100,000 buildings in more than 60 countries.
In 2017, the company merged with the multinational telecom and ISP Level 3 Communications, which gave it 200,000 additional route miles of fiber and a larger foothold in both the U.S. and abroad.
Since the merger, CenturyLink has focused on its enterprise, international, and small business customers. These make up roughly three-quarters of the company’s revenue, as opposed to only 25 percent for consumer broadband, video, and voice.
For example, CenturyLink [NYSE: CTL] now offers AT&T’s DirecTV satellite service, instead of selling its own cable package.
In June, CEO Jeff Storey mentioned that CenturyLink was conducting a strategic review of its consumer business, and that selling the business or spinning it off were both possibilities if the deal was value-accretive.
Unfortunately for CenturyLink investors, shares of the company are one of 2019’s biggest losers thus far: they fell by 23 percent in a time when the S&P 500 rose by 15 percent.
CenturyLink’s Q1 2019 revenue declined by 5 percent year over year. However, a bit of good news is that CenturyLink did manage to eke out 1 percent revenue growth for broadband, which helps to offset some of the losses in its consumer phone and video business.
Should You Invest in Frontier Stock?
Frontier Communications [NASDAQ: FTR] has many of the same challenges faced by CenturyLink [NYSE: CTL] in terms of declining revenues and subscribers. However, the company appears even less capable of addressing them than does CenturyLink.
To begin with, Frontier Communications [NASDAQ: FTR] is a smaller company than CenturyLink, operating across just 29 U.S. states. What’s more, Frontier announced in May that it would sell its operations in four of these states (Washington, Oregon, Idaho, and Montana) for $1.3 billion, which includes over 350,000 residential and business customers in this area.
Frontier Communications [NASDAQ: FTR] is currently pursuing a strategy more amenable to residential customers than that of CenturyLink.
More than half of Frontier’s business lies in consumer services, while just under half is devoted to enterprise customers. However, competition for residential customers is fierce in the telecom market, and likely doesn’t help Frontier’s financial woes.
The sale of Frontier’s operations in the northwestern U.S. should help the company pay off some of the $16.9 billion in debt that it currently carries. Unfortunately, the same can’t be said of Frontier’s revenues, which decreased in Q1 2019 by 4.5 percent.
CenturyLink Stock Vs Frontier Stock: The Bottom Line
The recent Chapter 11 bankruptcy of Windstream has made many investors wary of the regional telecom sector–and perhaps for good reason.
Neither CenturyLink stock nor Frontier stock comes out looking particularly strong in this head-to-head comparison.
If you’re absolutely sure you want to invest in the regional telecom sector, however, CenturyLink [NYSE: CTL] is likely the winner.
Because both CenturyLink stock and Frontier stock seem like risky investments, the best play here is to go with the safe bet that has the greatest chance to “stop the bleeding.” In this case, that’s CenturyLink, which has a larger network and a stronger focus on more lucrative enterprise customers.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.