Recent Key Developments
 
Frontier is expanding its broadband network in rural/underprivileged markets in West Virginia. The company has applied for federal funding of $55 million to deploy and connect fiber-optic cable from its central office to key public facilities, which will allow broadband speeds of up to 100 Meg. 
 
Moreover, Frontier is set to lead the pure-play rural telecom market by acquiring the rural fixed-line business of Verizon Communications (VZ) in 14 states for approximately $8.6 billion. The company recently received shareholders approval as well as approvals from the states of California, Nevada and South Carolina for this transaction.
 
The acquisition, which is expected to complete in second-quarter 2010, will offer meaningful cost synergies and opportunities for revenue growth through expanded broadband penetration, attractive bundled service offerings and improved customer retention.

Apple had earlier approved iCall, FriendCaller, Nimbuzz, Skype and Spotify app for its devices and now Vonage has been added to Apple’s App store.
 
All of these VoIP services use WiFi services to make calls. The apps that compete with Apple’s own services had been rejected earlier. However, Apple allowed VoIP apps that can work over WiFi only.
 
We believe that Apple will be benefited from the strong position of Vonage in the VoIP industry but we remain unsure about how different Vonage services will be from other app providers.
 
Carriers like Vonage provide services that are much cheaper than most traditional phone plans particularly for long distant calls, as a result of which consumers frequently change their preferences. Thus, it will be interesting to see how many new customers the Vonage service will be able to get for Apple.
 
Earlier, Apple rejected the Google (GOOG) Voice application from its app store, which is now subjected to an ongoing investigation by the FCC. Apple said that AT&T (T) in the U.S. bars it from allowing a customer to use AT&T's mobile network without explicit permission. This is due to stringent policies from AT&T, Apple’s exclusive carrier that blocks VoIP on 3G network due to quality issues.
 
AT&T would not want further competition from these service providers and may disapprove Vonage’s iPhone app to work over AT&T’s mobile network.
 
While we have several concerns over Apple’s new approval, shares of Vonage jumped approximately 40% after it received approval from Apple.

The year-over-year decline in revenue is attributable to lower local service, subsidy and switched access revenue coupled with decline in basic access lines, partially offset by increases in data and Internet service revenues.

Quarterly net income was $27.9 million, down 50% from the year-ago quarter, primarily due to acquisition-related expenses of $10.8 million, higher interest expenses and lower operating income which fell 16% year over year to $136.6 million.

Revenue for local services declined 8% year over year to $198.3 million while data and Internet services revenue increased 6% to $160.6 million in the same period. Switched access service revenue declined 13% year over year to $87.4 million while revenue from long-distance services fell 14% from the year-ago quarter to $40.6 million.

Frontier added approximately 13,800 high-speed Internet customers (down sequentially) and registered 613,800 (up 10% year over year) total high-speed Internet customers at the end of the quarter. Net additions to the video customer base also fell sequentially with a reported addition of 11,400 customers in the quarter, bringing the total number of customers to 157,400 (up 46% year over year).

The company recently declared a third-quarter dividend of $0.25 per share payable on Sept. 30. Dividend payment for the second quarter equates to a payout of 80% of the quarterly free cash flow. The company aims to offer 60-70% return to its shareholders in the form of dividend in 2009 based on strong free cash flow expectations.

Frontier has reaffirmed its full-year guidance for capital expenditure and free cash flow. The company continues to expect capital expenditure of $250-$270 million for the year. The projected free cash flow (excluding acquisition expenses) for 2009 remains between $460 million and $485 million.

The company lost 27,700 voice-access lines in the second quarter and had 2.19 million access lines, down 6% year over year. Frontier remains significantly challenged by the beleaguered economic condition in its service territories and contends with loss of legacy fixed telephony business to wireless and other competitive offerings including Voice over Internet Protocol (VoIP) services by cable TV operators.

In aggregate, approximately 65% of the company’s access lines were exposed to cable voice service offerings at the end of 2008 and this level is expected to increase further as competition intensifies in 2009.

Nevertheless, Frontier is set to lead the pure-play rural telecom market by acquiring the rural fixed-line business of Verizon Communications (VZ) under an agreement valued at approximately $8.6 billion.

The acquisition, if successful, will offer opportunities for revenue growth through expanded broadband penetration, attractive bundled service offerings and improved customer retention. The company may also achieve cost synergies of approximately $500 million from this transaction.

Earnings per share rose 7 cents to 39 cents from 32 cents in the year ago period. The Zacks Consensus Estimate called for 29 cents.

Net sales fell 2.9% to $965.7 million compared with $994.9 million for the year ago period. The decline was primarily due to a 4.6% decrease in sales generated by company-operated stores, a 3.2% decrease in kiosk sales, and an 18.8% increase in other sales.

Same-store sales declined 4% compared to a year ago. Sales declined in wireless accessories, digital-to-analog converter boxes, GPS products, music players and digital cameras. However, sales of netbooks, television antennas, prepaid wireless handsets, digital televisions and Voice over Internet Protocol Products rose.

Inventories fell by $48.1 million over the year ago period.

The company also grew its cash and cash equivalents to $930.8 million at the end of the quarter from $577.8 million as of June 30, 2008.

Zacks Consensus Estimates Rise

Following the estimates surprise, covering analysts moved to revise third quarter and full year estimates.

The third-quarter Zacks Consensus Estimates rose 3 cents to 31 cents in the last week with 11 out of 16 covering analysts raising.

15 out of 17 analysts also raised for the full year as the 2009 Zacks Consensus Estimate jumped 15 cents to $1.54 per share.

Value Fundamentals

RadioShack was a Zacks #1 Rank (strong buy) stock when I last reviewed it on May 29 and is now a Zacks #2 Rank (buy) stock.

It is still an attractive value stock, with a forward P/E of 10.03. It has an outstanding 1-year return on equity (ROE) of 23.84%.

As an added bonus, the company pays a dividend, with a current yield of 1.60%.

Read the May 29 analysis.

Update to Previous Value Zacks Rank Buy Stocks

JDA Software Group, Inc. (JDAS) is bucking the economic downturn as the company recently reported record second quarter results on the back of strong software sales. JDAS is trading with a forward P/E of 13.9. Read the full article.

Oriental Financial Group Inc. (OFG) continues to show strength in its key market of mid to high net worth clients as it recently surprised on earnings for the 8th consecutive time. Despite a run up in the stock price, OFG isn't expensive. It trades at just 4.1x forward earnings. Read the full article.

Cato Corporation (CTR) is finding consumers like its value-priced women's apparel as same-store sales for the first half of the year rose 1% compared to 2008. The company has surprised on estimates 3 out of the last 4 quarters by an average of 54.76%. CTR is trading at 14.9x forward earnings. Read the full article.

The Anderson's, Inc. (ANDE) is expected to report second-quarter results next week after beating the Zacks Consensus Estimate by 28 cents in the first quarter. Can it keep the momentum? Analysts are expecting 19.55% year over year earnings growth in 2009. Read the full article.

Zacks Investment Research

BT Group’s aim is to become the leading provider of networked IT services to mid and large-sized businesses and the public sector in general in Ireland. Vodafone will become the number-two player in the fixed broadband market and enjoy a 15% market share of the fixed broadband market. The value of the gross assets that are the subject of this transaction was 4.8 million euros at the end of March 2009.

In all its business segments, BT Group has been transforming itself from being a traditional telecom operator to a innovative provider of telecom solutions, and it is now taking advantage of future growth prospects, as it moves away from traditional businesses and into what it calls “New-Wave" businesses, such as broadband, Voice over Internet Protocol (VoIP), Wireless Internet Access, Networked IT services and IPTV. We believe BT Group’s New-Wave businesses are the drivers behind any growth the company will experience in the coming years, and BT Group understands that it has to constantly evolve with technology in order to stay ahead in the telecommunications business.

BT Group is an incumbent phone company providing fixed-line and data services to the United Kingdom. It owns or has stakes in operations in North America, the Asia/Pacific region, and Western Europe. BT Retail is the largest communications service provider by market share to consumers and businesses in the United Kingdom. It supplies a wide range of communication products, including voice, data, Internet, and multimedia services. The BT Wholesale segment provides network services and solutions within the United Kingdom, including its Asymmetric Digital Subscriber Line (ADSL) and Integrated Services Digital Network (ISDN) to BT Retail and BT Global Services, as well as to other communication companies, fixed and mobile network operators, and service providers.

Openreach was established in January of 2006 in response to OFCOM (UK Office of Communications) strategic review of the communications industry in the UK, and operates the physical assets of the local access and backhaul networks and provides the services which use those networks to communications providers, both internally and externally, and was spun out of BT Wholesale to become a completely independent entity from BT, although it remains wholly-owned by the BT Group. BT Global Services is BT Group’s managed services and solutions arm, serving multi-site organizations. 

We continue to maintain our Hold rating on BT Group.

Being a small player in a competitive industry, Internap has a relatively low revenue growth rate. Although the company has been gaining traction in its data colocation services, it is witnessing softness in its content delivery network business. Much of this has been caused by the weakening economy, which has forced INAP to trim its 2008 guidance twice.

Though the company has been making important upgrades to its CDN product, there has been a lackluster performance in the segment in the last few quarters. As such, we are initiating our coverage on INAP with a Sell rating and a price target of $2.50.

Read the full analyst report on INAP