In early August, Windstream CEO Tony Thomas said: "Our equity is undervalued especially given our improved strategic direction with enhanced product capabilities, management talent additions and anticipated acquisition synergies of $180 million. The elimination of the dividend along with the $90 million buyback program and delevering that will also occur will create value for all our stakeholders. This is the right path for our company."
The market certainly did not like this as Windstream share price dropped nearly half since, 45.2%.
First half performance 2017
The $389.3 million Delaware-incorporated and Arkansas-based telecom services company reported 4.5% revenue growth to $2.86 billion while it had (-)$179.4 million losses in the first half 2017 compared to (-)$230 million losses last year period.
As observed, Windstream total costs and expenses climbed 11.7% year over year to $2.7 billion resulting in thin operating margins at 5.3% add in the company’s interest expenses of $426.2 million resulting in losses for the company.
Valuations
Windstream has recorded four consecutive quarters of losses recently therefore resulting in no trailing P/E ratio. Nonetheless, the company is undervalued compared to peers. According to GuruFocus data, the company had P/B ratio 0.62 times vs. industry median 2.25 times, and P/S ratio 0.04 times vs. 1.5 times.
As mentioned earlier, the company has eliminated its dividend payouts that previously yielded 21.75%. Average revenue estimates for fiscal year 2017 indicated forward sales multiple 0.07 times.
Total returns
Windstream certainly failed to provide any good amount of return so far this year to its shareholders. According to Morningstar data, the company provided (-)68.08% total losses so far this year compared to the S&P 500 index’s 11.86%.
Windstream
Windstream was founded in 2006 and is the ninth largest residential telephone provider in the United States (Wiki). The company was formed in 2006, when Alltel's local telephone service merged with Valor Communications Group out of part of GTE (now part of Verizon's) local telephone business in the Southwestern United States.
Windstream is in partners with Dish Network, offering satellite service to its customers.
According to filings, Windstream is a leading provider of advanced network communications and technology solutions for consumers, businesses, enterprise organizations and wholesale customers across the United States.
The company provides data, cloud solutions, unified communications and managed services to small business and enterprise clients. It also offers bundled services, including broadband, security solutions, voice and digital television to consumers. The company supply core transport solutions on a local and long-haul fiber network spanning approximately 147,000miles, including network assets acquired in the Merger with EarthLink.
Historically, Windstream was solely focused on serving telecom companies based in the United States, but over the past year, the company has expanded its focus to sell its products and services to non-traditional telecom companies, including content providers, data center operators and international carriers requiring voice and data transport services in the United States.
Windstream has four segments: Consumer and Small Business – ILEC, Wholesale, Enterprise, Small Business –CLEC.
Consumer and Small Business – ILEC
Windstream manage its residential and small business operations in those markets in which the company is the ILEC (incumbent local exchange carrier) due to the similarities with respect to service offerings, marketing strategies and customer service delivery.
Further, products and services offered to customers include traditional local and long-distance voice services and high-speed Internet services, which are delivered primarily over network facilities operated by Windstream.
The company offers consumer video services primarily through a relationship with Dish Network LLC and Windstream also owns and operates cable television franchises in some of its service areas. The company also offers Kinetic, a complete video entertainment offering in its Lincoln, Nebraska, Lexington, Kentucky, and Sugar Land, Texas markets.
In addition, Windstream’s residential customers can bundle voice, high-speed Internet and video services, to provide one convenient billing solution and receive bundle discounts.
Lastly, small Business – ILEC services offer a wide range of advanced Internet, voice, and web conferencing products. These services are equipped to deliver high speed Internet with competitive speeds, value added services to enhance business productivity and options to bundle services for a global business solution to meet Windstream’s small business customer needs.
In the recent first half, revenue in the Consumer and Small Business – ILEC segment fell (-)1.8% year over year to $778 million from the year prior period representing 31% of total unadjusted segment revenue. This division also generated 55% segment margin in recent period compared to 56% the same period last year.
Wholesale
Wholesale operations are focused on providing products and services to other communications services providers.
The company’s services offerings leverage Windstream’s extensive fiber network to provide wave transport services, carrier Ethernet services, fiber-to-tower connections to support backhaul services to wireless carriers, and high speed Internet access.
Windstream also offers traditional services including special access services and Time Division Multiplexing private line transport. The combination of these services allow wholesale customers to provide voice and data services to their customers through the use of Windstream’s network or in combination with their own networks.
In the first half, revenue in the Wholesale business grew 3.2% year over year to $333 million (13% of total unadjusted revenue) and had margins of 67.8% (most profitable) vs. 72.9% last year period.
Enterprise
Products and services offered by Windstream’s enterprise operations include integrated voice and data services, which deliver voice and broadband services over a single Internet connection, multi-site networking services which provide a fast and private connection between business locations, as well as a variety of other data services, including cloud computing and collocation and managed services as an alternative to traditional information technology infrastructure.
In the first half, Enterprise business revenue climbed 8.4% year over year to $1.1 billion (43% of unadjusted sales; largest) and had margins of 17.6% vs. 16.4% last year.
Small Business –CLE
Products and services offered to customers include integrated voice and data services, advanced data and traditional voice and long-distance services, as well as value added services including online backup, managed web design and web hosting, and various e-mail services.
In the first half, revenue in small business –CLE grew 27.7% year over year to $333 million (13% of total unadjusted sales) and had margins 36.7% vs. 31.7% last year period.
According to filings, the recently acquired EarthLink’s consumer business and small business customers are now included in this segment. Windstream acquired EarthLink back in last quarter 2016 for $1.1 billion.
Sales and profits
In the past three years, Windstream registered revenue decline average of (-)3.46%, and profit margin losses of (-)2.48% (Morningstar).
Cash, debt and book value
As of June, Windstream had $24.7 million in cash and cash equivalents and $10.5 billion in debt and lease obligations ending with debt-equity ratio 16.7 times compared to 29.8 times the year prior period. Overall debt has increased $675.3 million year over year while equity rose by $301 million.
47.8% of Windstream $12.71 billion assets were identified with blue sky elements such as goodwill and intangibles while book value increased by 91% year over year to $630 million.
Cash flow
In the first half, Windstream’s cash flow from operations declined by (-)16.7% year over year to $353.7 million. In addition to losses, the company registered higher cash outflow in relation to its deferred income taxes, prepaid expenses and other, and other current liabilities.
Capital expenditures were $507.8 million—higher than its cash flow—resulting in free cash outflow of (-)$154 million compared with (-)$85.8 million in the year prior period. Despite the outflows, the company provided $35.6 million in dividends prior to its recent termination.
Windstream also raised $256.7 million in debt net costs and repayments.
The cash flow summary
In the past three years, Windstream allocated $2.83 billion in capital expenditures, reduced debt by $21 million net issuances, generated $587 million in free cash flow, and provided $1.11 billion in dividends and repurchases—significantly more than the company’s free cash flow.
Conclusion
The strategic shift to buybacks and halting dividend payouts for a renewed prudent cash flow strategy did not pacify Windstream’s shareholders as its recent share price plunged. In addition to the strong growth recognized as a result of its EarthlinLink acquisition last year, year over year business performance did indicate that the company has brought some growth back in its revenue.
Nonetheless, the company has pulled in more debt in recent times while having nearly half of its assets identified with blue sky elements. Windstream also has served its shareholders very well in terms of having provided a little more than 1.9 times its free cash flow in payouts in recent years.
Analysts have an average price target of $3.48 vs. $2.11 at the time of writing. Applying 2018 average analyst revenue estimates with three-year PS average and a 55% margin indicate a per share figure of $4.66.
Ignoring the declining revenue, blue sky elements, and leveraged balance sheet, Windstream could be a buy with a good upside having a set target price of $3.6 a share.
Disclosure: I do not have shares in any of the companies mentioned.
