Why is Paul Tudor Jones Buying More Frontier Communications and not Facebook?
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the arts there is the concept of "negative space." Isaac Stern described music as, "the little bit between each note...silences which give the form." For music, negative space is silence. In investing, it takes form as the assets that were not bought as contrasted with those that were acquired.
During the dot.com craze, legendary investor Warren Buffett did not buy any of the hot stocks of that era as he claimed he did not understand them. Of course "The Oracle of Omaha" understood dot.com stocks and from not buying any for the portfolio of Berkshire Hathaway (NYSE: BRK-A), he was able to profit in the future. This same negative space investing lesson is now taking place with hedge fund billionaire, Paul Tudor Jones, another legendary investor, greatly increasing his holdings in Frontier Communications (NASDAQ: FTR) while not taking a position in Facebook (NASDAQ: FB).
Paul Tudor Jones owns more than six million shares of Frontier Communications, a telephone company based in Stamford, Connecticut that is the largest provider of services to rural areas in America. Over the last year of market action, Frontier Communications is off more than 45%. There are plenty of reasons for this to be found on the balance sheet and income statement. Overall, Frontier Communications is suffering from a "steady exodus" of business and residential customers, according to an excellent recent analysis by Sean Williams of Motley Fool.
From this loss of clients, both the sales growth (-5.84%) and the earnings-per-share growth (-51.47%) are plunging on a quarterly basis for Frontier Communications. For the year, earnings-per-share growth is down by 36%. There is no earnings-per-share growth expected for next year, either. The price-to-earnings growth ratio is very bearish at 3.29. The balance sheet is larded down with debt with a debt-to-equity ratio of 2.55. Frontier Communications is barely making money with a slim profit margin of 2.55%.
By contrast, Facebook has a profit margin of 26.95%. On a quarterly basis, sales are rising by more than 44% for Facebook. Earnings-per-share growth is up by almost 80% this year. Obviously numbers like that cannot be sustained, but the earnings-per-share growth for next year is projected to be 27.45%. With a debt-to-equity ratio of 0.13, Facebook has a relatively clean balance sheet as evinced by a current ratio of 4.52.
But Frontier Communications is where Facebook needs to be in critical area for survival: online marketing and advertising for small and medium-sized businesses.
Frontier Communications has FrontierPages, which has been described as an "electronic Yellow Pages." FrontierPages is in a profitable partnership with The Berry Company, a leading provider of local online, search, video and print solutions. This brings advertising and marketing revenue for Frontier Communications. For these earnings, FrontierPages provides advertising solutions for small and medium-sized businesses through, among other services, search engine optimization, search engine marketing, and video marketing services.
As for businesses marketing on Facebook, Nate Elliott, Vice President and Principal Analyst serving Interactive Marketing Professionals for Forrester Research, recently wrote, "But as good as Facebook has been at evolving to serve consumers, that’s how bad it’s been at serving marketers. In the past five years Facebook has lurched from one advertising model to another. Remember when the site charged marketers to host branded pages? Or when every page featured banners from MSN’s ad network? (You may choose to forget Facebook Beacon; Mark Zuckerberg would certainly prefer you did.)
Somehow Facebook still hasn’t stumbled upon a model that’s proven consistently successful for marketers, or that brings in the massive revenues to match the site’s massive user base. (The company made less than $4 in ad revenue per active user in 2011.) And its latest ‘big marketing announcement’ in February turned out to be mostly a tiny evolution of its existing ad model. At the same time, Facebook often stands directly in the way of marketers’ efforts to measure the performance of their programs.
The result? One global consumer goods company told us recently that Facebook was getting worse, rather than better, at helping marketers succeed. And companies in industries from consumer electronics to financial services tell us they’re no longer sure Facebook is the best place to dedicate their social marketing budget – a shocking fact given the site’s dominance among users.
The reason, of course, is that Facebook just doesn’t pay nearly as much attention to marketing as it does to user experience. (Not surprising, given its founder’s famous loathing for advertisers.) If Facebook did pay much attention to the marketers who handed it billions of dollars last year, and who make the site’s very existence possible, maybe we’d see innovative new marketing solutions every six months rather than every few years. Perhaps the company would’ve spent a billion dollars on an ad exchange or marketing measurement tools rather than a simple photo-sharing app. Maybe, just maybe, marketing on Facebook would actually work. But marketing on Facebook doesn’t work very well, and marketers can’t count on things improving anytime soon."
FrontierPages, by contrast, is a revenue generating venture for Frontier Communications that is expanding into 142 local markets by 2014, more than 35,000 businesses in toto. While the Yellow Pages are old school, FrontierPages offers a complete line of high tech offerings: websites, mobile solutions, SEO and SEM services as well as video advertising. Most important of all, FrontierPages is profitable for Frontier Communications. When the extension of the partnership with The Berry Company was announced on June 14, the share price rose more than 10% shortly thereafter for Frontier Communications. There is nothing old school about that, which certainly explains the appeal to Paul Tudor Jones.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.