Tuesday, April 11

Today or fund continued to out-perform most of the concentrated indices, though we lagged the Dow Jones Composite slightly. Our gains were lead by small-cap S&P 500 ETFs, and our exposure to oil (crude is up again, making this a nearly three week long up-streak). Our outlook for our holdings in FTR/PR continue to be very positive, though even with the discount we managed to get to FV we still only managed to dodge a small portion of the risk inherent in a position directly in Frontier common stock.

If FTR dramatically outperforms analyst expectations (which remains a possibility, and we’ll get into why in a moment) we gain very strong leverage in conversion to common stock. In conversion the face value (in this and most cases $100) is divided by the market price of the common stock to determine how many shares each preferred issue is worth, with the fewest shares each can be worth capped at 17.0213. This means that if theoretically the share price topped $6, each preferred share would be worth far more than even FV. On review of our return calculations we realized that we’d been using the wrong multiple, and our position is actually very much stronger than we had initially thought. Market price of the common stock would have to fall significantly before our position became unprofitable before conversion.

While that outcome remains incredibly unlikely, it remains a possibility. Frontier Communication has resolved many of their outstanding debts, and is considering cutting the dividend of their common stock. That increase in free cash flow is ultimately what they need at this point, and I think investors are sensitive to that fact. Cutting the dividend might drop the share price in the very short term (one quarter or less) but ultimately increase it as FTR’s books strengthen. The company is also on track to add 47,000 more households in Missouri by 2018, all as broadband acquisitions. $4.00/share is becoming much more likely, which we like. Our ideal case would be a stock price over $5.875/share. This remains incredibly unlikely, but we’ll be keeping an enthusiastic eye on the situation.

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