Barry Posternak on Fairpoint (FRP)

The near term driver for Fairpoint (FRP) stock is the labor contract.

As I’ve previously discussed, FRP’s union contract expired August 2 and the union

employees are working without a contract.

On August 28, Fairpoint announced that the talks remain deadlocked and it will impose its

own proposal.

As it is highly unlikely that the union will accept all of Fairpoint’s demands, barring a negotiated settlement which doesn’t seem to be possible at the current time, the unions

seemingly only option is to go on strike.

This would certainly negatively impact Fairpoint’s near term performance.

Fairpoint’s customer service, already terrible by my own experience, would become

dramatically worse.

The strike would certainly have a negative impact on new customer sales and renewals.

In Fairpoint’s press release, it stated that its proposal includes no change in current wage rates, substantially the same benefit plans,

including medical, as are available to management employees, a freeze of the

existing defined benefit pension plan, while preserving employees' current accrued

benefits, and elimination of retiree medical for current employees.

As this represents the best possible (though highly unlikely) outcome for the company, it would appear this proposal could have a material impact in reducing its pension/OPEB liability on the balance sheet, but not in terms of reducing its operating expense by more than a few million dollars annually.

Based on Fairpoint’s valuation and recent stock price performance while the company has missed estimates, it

appears there is relatively high expectations in the stock for operating expense relief from a new union contract.

Note also that even before a strike, larger customers are likely unwilling to commit to large projects or

installations knowing that a strike may be coming soon.

Therefore, Fairpoint’s near term performance, challenged even without this headwind, is

likely to get even worse in the current quarter.

It appears, therefore, that the near term risk/reward for a short position remains

favorable.