Over the past six months, Frontier’s shares (currently trading at $3.82) have posted a disappointing 8% loss, well below the S&P 500’s 5% gain. This might have investors contemplating their next move.
Is there a buying opportunity in Frontier, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Frontier Will Underperform?
Even though the stock has become cheaper, we're swiping left on Frontier for now. Here are three reasons you should be careful with ULCC and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Frontier grew its sales at a 24.4% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. New Investments Bear Fruit as ROIC Jumps
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Frontier’s ROIC increased by 1.9 percentage points annually each year over the last few years. This is a good sign, and we hope the company can continue improving.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Frontier burned through $600 million of cash over the last year, and its $5.46 billion of debt exceeds the $671 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Frontier’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Frontier until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies helping consumers, but in the case of Frontier, we’re out. Following the recent decline, the stock trades at 8× forward EV-to-EBITDA (or $3.82 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. We’d recommend looking at one of our top digital advertising picks.
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