What Does Frontier’s High Price-to-Earnings Ratio Mean?
The Tech Sector: How's It Affecting XLK Performance?
Price-to-earnings
Let’s look at forward price-to-earnings (or PE) ratio for stocks in the Technology Select Sector SPDR ETF (XLK). PE ratios for CenturyLink (CTL), Frontier Communications (FTR), AT&T (T), and Verizon Communications (VZ) are 13.22x, 55.22x, 13.93x, and 12.03x, respectively. The average forward PE ratio for this subsector is 23.60x, mainly due to the high ratio for Frontier Communications (FTR).
In comparison, companies that are part of the Communications Equipment sector, such as Cisco Systems (CSCO), Juniper Networks, and Level 3 Communications, have a forward PE ratio of 12.63x, 14.22x, and 23.22x, respectively.
FTR five-year growth rate estimated at 5.70%
Frontier Communications (FTR) has a dividend yield of more than 8%, which most investors find unsustainable. High dividend stocks are generally considered high risk. The market prices them according to future earnings potential. Stocks that offer high dividend payouts will see a fall in their yield on cost ratio as the stock price increases.
FTR has a PE ratio of 55.22x. EPS fell 21.5% in 2013 and rose 18.2% in 2014. With a falling EPS, this is a high PE ratio, as it indicates a risk of declining stock price.
Frontier Communications has an estimated five-year annual growth rate of 5.70% and a PEG (price-to-earnings-to-growth) multiple of 22.63x. The PEG ratio considers long-term growth in a company’s earnings. Generally, a stock with a PEG ratio below 1 is considered underpriced, whereas a ratio between 1 and 2 suggests a fair value. FTR’s high PEG ratio indicates the stock is currently overpriced.
EV-EBITDA
The EV- (enterprise value) to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio is an important metric to value comparable companies, as the capital structure is neutral. The TTM (trailing 12-month) EV-EBITDA ratio for CTL, FTR, AT&T, and VZ stands at 6.15x, 7.64x, 6.06x, and 6.94x, respectively. Generally, the lower the ratio, the more undervalued the company is believed to be.
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