Macquarie's New Telecom Top Pick? Frontier Communications

In a report published Thursday, Macquarie Capital analyst Kevin Smithen named Frontier Communications Corp FTR his new top idea through year-end following the company's 8k release on Wednesday.

Smithen noted that Frontier Communications' 8k release with its second-quarter financial results for the VSTO (Verizon Communication's Separate Telephone Operations in California, Florida and Texas) showed operating revenue growth of 0.4 percent year-over-year, an improvement from the 1.4 percent year-over-year decline in the prior quarter and LQA (last quarter annualized) revenue implies 0.2 percent year-over-year growth, also an improvement from the 0.6 percent decline in 2014/2013 and 1.4 percent decline in 2013/2012.

The report also showed EBITDA margins increasing 90 basis points sequentially and trending "slightly higher" than the analyst's 27.0 percent assumption. Moreover, adjusted EBITDA margins (adjusted for unallocated costs) rose 130 basis points sequentially to 30.4 percent while the company generated a GAAP free cash flow of $330 million for the first half of the year – up $286 million year-over-year primarily due to working capital benefits and lower capital expenditures.

Finally, subscriber trends were "mostly in line" with the company's historical trends while FiOS internet and video subscriber growth were "positive."

Bottom line, Smithen stated that the "vastly improved" results should enable the company to complete its pending bond deal on more attractive terms. As such, when completed, the stock can rally through $6 over the next few months.

Shares remain Outperform rated with a price target raised to $7 from a previous $6.75.