Frontier has had an impressive run over the past six months as its shares have beaten the S&P 500 by 16.3%. The stock now trades at $6.04, marking a 27.1% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Frontier, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Frontier Will Underperform?
We’re glad investors have benefited from the price increase, but we’re cautious about Frontier. Here are three reasons why ULCC doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Frontier grew its sales at a 26% 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 Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Over the last few years, Frontier’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Restricted Access to Capital Increases Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Frontier posted negative $21 million of EBITDA over the last 12 months, and its $5.24 billion of debt exceeds the $955 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
We implore our readers to tread carefully because credit agencies could downgrade Frontier if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Frontier can improve its profitability and remain cautious until then.
Final Judgment
We see the value of companies helping consumers, but in the case of Frontier, we’re out. With its shares topping the market in recent months, the stock trades at 47.9× forward P/E (or $6.04 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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