Over the last couple of months, there has been sizeable insider selling in the computer makers--Dell, Compaq, Apple, and Gateway. The timing of these sales is telling, as many of the companies' shares have retreated from high levels. Granted, it should come as no surprise to see insiders cashing in following strong holiday sales. I am willing to speculate, however, that many insiders anticipated a slow-down, as inventories started to back up, and consumers delayed buying decisions until after the release of the Pentium III chip.
The real test will be to see how insiders react to the current market conditions. Dell Computer, for example, has essentially moved in one direction for the last two years--upward--and the repeated rounds of insider selling could easily be characterized as profit taking. However, insider selling while a stock is in retreat sends a different message. The markets will closely watch computer hardware insiders for clues about the health of the industry.
There have been some isolated pockets of technology insider buying--Elantec Semiconductor, Analysts International, Hyperion Solutions, and Platinum Software, to name a few. There has also been some insider buying at Silicon Valley Bancshares, financial lender to a number of high-tech startups. One area that seems to be drawing some insider attention is telecommunications, with insider accumulation at service firms like Billing Concepts, Anixter International, and Aspect Telecommunications. One of the most interesting telecommunications stocks from this perspective is Frontier--a company whose top executives continue to buy shares as the company works to transform itself from a voice to data outfit.
Four insiders at Frontier, the country's sixth largest long distance provider, recently stepped in to purchase 6,532 shares, valued in excess of $237,000. David Carey, senior vice president of Product and Market Management, led the group by adding 3,000 shares at $34.69 to $37.25 between February 2 to 12. These transactions increased Carey's common holdings by 150 percent to 5,000 shares. On February 2, chief financial officer Rolla Huff purchased 1,000 shares at $36.88. President and chief executive Joseph Clayton followed by purchasing 2,450 shares on February 10 at $36.44 to $36.50.
Prior to this recent activity, no significant insider buying had occurred at Frontier in over six months.
This insider buying is more compelling in light of the stock's strong technical picture, as Frontier shares currently trade at an all-time high of 42.1875 (as of March 15). The stock is also above its 10 and 50 day moving averages, which are both still trending upward. In fact, over the past four months, Frontier shares have gained nearly 50 percent, after falling to around 24 in early October.
The stock momentum is reflected in the company's recent actions. On February 26, Clayton announced that the company is exploring various alternatives to maximize shareholder value. Clayton has said he believes that Frontier is currently undervalued as Wall Street still sees the company as a regulated utility.
Management, on the other hand, believes Frontier should transform itself into an Internet communications company, to take advantage of the lucrative data market, rather than focus on its local phone services. Frontier has already made these moves, as the company provides web hosting to over 300 brands, including Yahoo, USA Today Online, USWeb, and Motley Fool. The company soon plans to unveil its nationwide Internet Protocol (IP) backbone for high-speed commercial traffic. In order to maximize the potential of these various units, Clayton has considered spinning off the local exchange business or possibly the company's Internet operations.
Earlier in January, the company slashed its dividend by 78 percent from 89 cents to 20 cents. Frontier held that earnings would be better spent funding capital expenditures, rather than supporting quarterly payouts.
Over the past several years, Frontier has had to rely on debt financing to fund its aggressive capital spending. These financing decisions caused its debt/equity level to rise to 1.1, substantially above the 0.4 industry average. Several other competitors, including MCI Worldcom and Qwest Communications do not pay any dividends at all. Thus, Frontier's move is aimed at bringing its dividend policy in-line with industry standards.
The earnings picture at Frontier is also positive, as I/B/E/S analysts expect next year's earnings per share (ending December 2000) to hit $1.52, a gain of 25.6 percent from this year's consensus estimate of $1.21. The company also has a stellar earnings surprise record, meeting or exceeding analysts' earnings projections for each of the past five quarters--with an average positive surprise of 4 percent over that time period.
Of the 19 I/B/E/S analysts surveyed, 9 currently rank Frontier stock as a "buy" and 10 a "hold".
Recent actions by Frontier insiders confirm the company's commitment to maximizing shareholder value. However, for Frontier to reap higher valuations, they must succeed in transforming the market's perception of its business.