Windstream: How Low Will It Go?

On May 7, evolving wireline carrier Windstream Holdings, Inc. WIN, or "OpCo," hosted its first earnings call since its April REIT spin-out of Communications Sales and Leasing CSAL, or "PropCo," and related 1:6 reverse stock split.

Details can be found here explaining WIN-before and WIN-after the CS&L spin.

However, a simple concept is when WIN shares drop the yield on its shares rises. Based upon the new WIN $0.60 annual dividend, the recent two-day drop in WIN shares has increased the yield about 50 bps, to ~6.5 percent.

Windstream/CS&L Post-Spin Structure

Source: Citi Research

May 7, After Q1 Earnings Call

Windstream had traded in a 52-week range of $19.05 to $10.09 per share (adjusted for spin and reverse-split), before closing down almost 4.4 percent on Thursday, at a then-new low of $9.83 per share.

Tale Of The Tape - May 8, Another New Low

On May 8, DA Davidson updated Windstream after its earnings call, slightly lowering its target price; WIN closed down another 6 percent by Friday's close, having made another new low of $9.11 during mid-day trading.

DA Davidson - Maintain Neutral, PT Lowered To $10.50

The new Davidson price target represents a potential 12.7 percent upside from the $9.32 mid-day price (at time of writing). Davidson values WIN "at roughly 5.4x EV/EBITDA, a discount to other rural carriers due to declining revenue and not owning their assets."

DA Davidson Earnings Call Takeaways

• Q1 Earnings: Light on revenue and EBITDA, down year-over-year 3.2 percent and 8.5 percent, respectively, and below Davidson estimates.
• Margin/Guidance: WIN management maintained its "2015 forecast for a revenue decline of 4% to flat, an EBITDA margin of 34.0%-34.5% and Capex of $825-$875 million."
• Debt Reduction: WIN intends to sell its ~20 percent stake in CS&L to reduce debt another $850 million based upon current CSAL share value.
• Growth & Expansion: WIN is looking to consumer broadband to drive growth and will be investing in fiber expansions to leverage its existing network assets; including an anticipated $50 million joint investment with CS&L.

The best case for management is treading water on revenues, with the low-end guidance forecast sinking an additional 4 percent.

Davidson noted regulation, acquisition integrations and high levels of debt as being the primary risk factors.

What About The CS&L REIT?

Shares of the new CS&L REIT have fared much better since the new REIT began trading at $27.00 per share on April 27. CSAL shares have traded in a range of $27 to $27.99 since the spin. Davidson initiated Communications Sales and Leasing shares at Neutral with a $28.50 price target.

The Davidson PT represents a potential 3.1 percent upside from Friday's price level ($27.65), not including a $2.40 annual dividend currently yielding ~8.7 percent.

Investor Takeaway

In some ways, growing Windstream revenues seems akin to a task to fill up a leaking bucket bought on credit.

As legacy customers leak away, the fiber optic and copper "hose lines" needs to increase the flow of phone, broadband, digital TV, and business services at a greater rate, in order to accomplish the mission.

Having now leased the land under the bucket to help pay down the credit card balance, time is of the essence to increase inflows in order to grow the dividend that investors crave -- and to make sure the rent check to CS&L clears each month.