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Windstream Communications: Despite Headwinds, Still A Great Investment

March 06, 2012 | About:
Windstream is a service provider of broadband, phone and digital services mostly in rural areas. It also provides network communications including cloud computing and managed services to businesses. Windstream was founded in 1943 as Allied Telephone Company and has grown through acquisition since inception. Since 2002 the company has undertaken mergers or acquisitions that have increased its subscriber base, expanded business activities into cloud and managed services and increased its geographic footprint in broadband, and access lines in many rural areas in the U.S. It services over three million customers in 29 states.

Windstream is the product of the competitive marketplace in the U.S. for telecommunications services. Unlike other countries that either bar foreign ownership of communications services or only allow government agencies to either completely control or strictly regulate the competition in the marketplace, the U.S. allows open and broad competition for telecommunications services. Windstream built a viable niche for itself as a mainly rural service provider to consumers. Its expansion into business services has expanded its horizons beyond the rural pattern. This stock is an interesting play in the telecommunications space as its business plan has not included the mobile market to date.

Windstream Corporation’s (WIN) stock trades around $12.50. It has a year high of $13.57 and a year low of $10.76. The price earnings ratio is 24:27. The earnings per share are $0.51. The dividend yield is 8%. Windstream has revenue of $4.06 billion and net income of $257.30 million. Windstream has a market capitalisation of $6.43 billion. The company has total cash of $34.30 million and total debt of $7.47 billion. The current ratio is 0:94 indicating the company may have some difficulty in meeting current liabilities as they come due. Book value per share is $1.60

On February 9, 2012 the company announced that it is approaching its lenders to amend its existing senior secured credit to provide for and additional $280 million in term loans. Partial proceeds will be used to pay down existing revolving facilities. In addition, the amendment will extend the maturity of some term loans, provide the ability to refinance and extend the maturity of any term or revolving loan. This is a good move for the company as its debt to equity is high at 908:05. This will alleviate any long term pressure the company may anticipate. In addition it will impact favourably on the company’s current ratio, allowing it to borrow at lower rates in the short term and service its current liabilities at a more favourable rate.

Third quarter 2011 results showed total revenues of $1.023 billion, a six percent increase from the same period in 2010. Business and broadband revenues increased two and seven percent respectively on a year over year basis. Business and broadband accounted for 61% of total revenues in the third quarter. Net income was $72 million, a 16% decrease from the previous year. Decreases were due to merger, integration and restructuring costs. Capital expenditures increased 57% from 2010 to $178 million.

The company increased its number of high speed internet customers by 9,300 in the quarter which brings its total customer base to approximately $1.35 million and increase in excess of 4% year over year. The company estimates its broadband penetration is 65% of the residential lines market.

The company declared a dividend of $0.25 per common share on February 8, 2012, payable March 30, 2012.

During 2011, Windstream acquired PAETEC Holding Corp., (formerly, PAET) to grow revenues in business and broadband services, create a nationwide network and to enhance key strategic growth areas such as metro fibre, data and managed services. The transaction was based on the issuance of Windstream common stock worth approximately $891 million to holders of PAETEC and the assumption of PAETEC’s debt of $1.4 billion. The company’s CEO is quoted as saying: “This transaction significantly advances the strategy to drive top-line revenue growth by expanding our focus on business and broadband services”. Its acquisition o PAETEC in changes Windstream’s profile from a mostly rural service provider to a company that provides communications and technology services nationally.

Windstream’s closest competition in terms of size is Sprint Nextel Corp (S). Sprint’s difference is that it reaches many more users (55 million) through its mobile networks. Sprint’s market capitalization is $6.89 billion. It has revenue of $33.68 billion. Its net income is negative ($2.89 billion) as are its earnings per share at ($0.96). Sprint trades around $2.30. It has a year high of $6.45 and a year low of $2.10 it does not pay a dividend. Sprint has total cash of $5.60 billion and total debt of $20.27 billion. Its current ratio of 1:59 indicates its ability to cover current liabilities as they come due. Its book value per share is $3.81.

Sprint reported fourth quarter 2011 operating income of $842 million and $5.1 billion for the full year. Wireless service revenue increased by 7% over the full year of 2011 which was the largest recorded increase in the U.S. wireless industry. It also reported the strong revenue growth and cost management partially offset the impact of sales expenses associated with the launch of the new iPhone. The improvements were as a result of higher wireless service and equipment revenues which were offset by a reduction in wireline revenue.

Sprint’s most recognizable attribute is its mobility footprint, providing the first mobile 4G network in the U.S. as well as being the carrier for highly recognized pre-paid brands such as Virgin and Boost mobile. Entry, branding and technology upgrade costs in the mobile market far exceed those of managed services and broadband. The company generates almost nine times Windstream’s revenue yet it has negative earnings and net income indicating that its cost controls and debt service obligations still outweigh growth in its concentrated business space. Sprint’s debt load is worrying. Windstream’s ability to keep acquisition and operating costs in line and return value in the form of dividends to its shareholders make it a more attractive investment in the telecomm space.

Windstream’s negative is its debt load, and the company has undertaken steps to mitigate it this year. Any restructuring of the debt will have a negative impact on the dividend yield. It is possible that the stock will suffer a bit in the short term as yield seekers will probably exit the stock which currently trades at around 11.5 times book value. However, the company represents good value in terms of its mix of services and asset base, conservative cash management strategies and its historical ability to return value to investors.

I believe the company will continue to make measured, revenue and growth enhancing acquisitions in its particular niche which will inhibit the upside potential of the stock in the long term as the market it is targeting is finite. I still think it has a long way to go. I think the stock price will suffer if the dividend is cut. I believe Windstream is a good investment at these levels and I think that at some point it may be an attractive takeover target for a larger company – maybe for its broadband and managed services business.

About the author:

Dividend King
I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.

I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.

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