Windstream Upgraded to Neutral - Analyst Blog

We are upgrading our long-term recommendation on Windstream Communication (WIN), the fifth largest local telephone carrier in the U.S., to Neutral from Underperform. We believe the company's liquidity concerns will be reined in by the growth opportunities ahead. Currently, the stock has the Zacks # 3 (Hold) Rank.

Windstream's ongoing acquisitions to expand its coverage markets and subscriber count are vital for its survival in an industry that is consolidating. We believe acquisitions will spur the company's growth going forward as Windstream focuses on growing within broadband and business services.

Windstream continues to acquire smaller rural carriers to expand its customer base. It acquired Iowa Telecommunication in June for approximately $1.2 billion to boost its presence in Upper Midwest, Q-Comm Corp. for $818 million and Hosted Solutions for $310 million both in December. These acquisitions have strained the balance sheet as the company is predominantly funding most of them with debt. Windstream had roughly $6.6 billion in total debt at the end of the third quarter (up from $6.3 billion at the end of 2009).

In the third quarter of 2010, Windstream reported adjusted earnings per share of 20 cents, which were in line with the Zacks Consensus Estimate. However, adjusted earnings rose 11% from 18 cents in the year-ago quarter on improving revenue trends in both business and consumer channels. Total access lines continued to decline by roughly 30,700, reaching 3.3 million at the end of the third quarter.

Windstream is focusing on bundled services that combine voice (local/long-distance), video and broadband Internet services to fend off competition. The company is experiencing an encouraging growth in high-speed Internet and digital TV businesses, boosted by aggressive bundled service offerings and promotional initiatives. Windstream is streamlining its organizational structure (automation, workforce optimization and improving network efficiency) for improving its operational efficiency. The company is also investing for the expansion of its fiber-optic network in order to support its wholesale business to wireless carriers and expand its opportunities in wireless backhaul.

Further, Windstream's healthy free cash flow, mostly generated through the ongoing cost-cutting initiatives, will support the high dividend payout at least over the near term. The company is currently paying an annual dividend of $1.00 per share. This represents a high dividend yield of approximately 7.67% compared with its peers AT&T Inc. (T) and Verizon Communication (VZ). Both the companies have dividend yields of approximately 6%.

On the flip side, the company remains challenged by sustained erosion in voice access lines due to stiff competition from cable and wireless operators. Wireless services from Tier-1 carriers such as AT&T and Verizon and broadband services by leading cable operators such as Comcast Corporation (CMCSA) and Time Warner Cable Inc. (TWC) are impeding Windstream's addressable market.

Consequently, we remain on the sidelines due to the competitive pressures, its highly leveraged balance sheet as well as continued access-line erosion partially offset by high dividend yield and broadband opportunities.

 
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