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Windstream (NASDAQ:WIN) is a leading provider of cutting-edge telecom services and infrastructure, including data and voice services, cloud computing, managed IP networking and network security to U.S. businesses (B2B) as well as broadband, home phone, digital TV and security pack services to residential consumers (B2C). On September 3, 2013, Windstream acquired a holding company and has been renamed into Windstream Holdings. According to the company's announcement:

the new ownership design will enhance Windstream's corporate structure and provide greater financial and strategic flexibility in the future. In addition, the new structure mirrors that of other companies in the telecommunications industry.

With a customer base of nearly 3.4 million people, as of June 2013, Windstream gradually establishes a strong presence in the market. With a constant focus on growth, the company capitalizes on both its enterprise and broadband business segments as key revenue contributors. More specifically, the enterprise segment contributes 60%, while the broadband segment contributes 8% to the company's total revenue. On November 7, 2013, Windstream will release its Q3 fiscal earnings for the quarter ending September 30. Although the company is expected to present good fundamentals to sustain future growth, there is a debt financing concern, which cannot be omitted.

Windstream loves acquisitions, but what about debt?

In the period 2007-2011, Windstream engaged into a continuous acquisition plan. More specifically:

  • On May 29, 2007 Windstream acquired CT Communications for $585 million to expand its customer base in access lines and broadband in North Carolina.
  • In 2009, Windstream acquired D&E Communications in May for $330 million to expand its presence in Pennsylvania with the addition of new access lines and high speed internet customers and Iowa Telecom in November for $1.1 billion, which enhanced Windstream's presence in Minnesota and Iowa through the addition of numerous access lines, high-speed Internet customers and digital TV customers.
  • In 2010, Windstream acquired Nuvox in February, Q-Comm Corporation in August for $782 million and Hosted Solutions in November for $310 million.
  • In December 2011, Windstream acquired PAETEC Holding.

Windstream's acquisition spree seeks to expand its customer base and increase market share in the US market through the promotion and selling of more broadband and business services. However, acquisitions have a certain cost, and to safely assume that Windstream enters into cost synergies, this cost should be integrated.

In spite of Windstream's penetration strategies through broadband and business services, the company carries a debt burden. From 2008 to 2013, Windstream's long-term debt has climbed from $5.36 billion to $8.8 billion, increased by 64.2%. Furthermore, on January 8, 2013, the company announced that it seeks refinancing of $1.345 billion for existing term loans with July 2013 and December 2015 maturities. Due to this new debt issuance, Windstream's position remains highly leveraged, with a major impact on the company's liquidity.

In my view, the increasing debt burden is partly the result of the heavy expansion plan. Windstream operates in an industry which experiences consolidation, and as such, it struggles to increase its coverage markets and customer count. However, the cost of acquisition is not absorbed. On the contrary, the company's fundamentals show that Windstream is funding market penetration through long-term debt, thus increasing its debt position. And, in spite of a series of deleveraging strategies taking place, the company struggles to generate cash flow and support its growth prospects.

Windstream and Competition

Direct Competitor Comparison

WIN

FTR

CTL

T

S

VZ

Industry

Market Cap:

5.07B

4.48B

19.98B

187.03B

25.33B

145.33B

184.06B

Employees:

13,787

14,100

46,900

246,740

39,000

183,400

241.81K

Debt to Equity Ratio

9.55

2.08

1.12

0.88

4.86

1.09

0.92

Qtrly Rev Growth (yoy):

-0.02

-0.05

-0.02

0.02

0.00

0.04

0.89

Revenue [TTM]:

6.09B

4.88B

18.19B

128.17B

35.44B

119.53B

128.17B

Gross Margin :

0.53

0.91

0.61

0.56

0.42

0.62

0.56

EBITDA :

2.26B

2.27B

7.56B

28.44B

5.30B

34.08B

28.44B

Operating Margin :

0.15

0.22

0.16

0.10

0.02

0.15

0.19

Net Income :

145.10M

98.85M

1.07B

7.48B

-4.33B

2.20B

N/A

EPS :

0.24

0.1

1.73

1.36

-1.44

0.77

1.36

P/E :

35.37

44.8

19.25

25.89

N/A

66.03

25.48

Source: Yahoo Finance

Windstream has the highest debt/equity ratio of all direct competitors, as well as from the industry. Companies like Verizon (NYSE:VZ) and CenturyLink (NYSE:CTL), have a debt to equity ratio which is slightly above the industry average of 0.92, while AT&T (NYSE:T) has a debt/equity ratio of 0.88, which is lower than the industry average. A debt/equity ratio demonstrates how many times a company's long-term debt exceeds its equity. A higher proportion of debt compared to equity leads to higher volatility in earnings and increases the probability that a company may default on debt due to higher financial leverage. Given that Windstream has been very acquisitive over the past few years, the financial risk is fairly explained by the company's inability to increase its profits through debt financing. However, the ratio is extremely high.

On the other hand, in terms of gross margin and operating margin, Windstream does very well. Both ratios show that the company has money retained to cover its payments towards interest expenses, fixed costs, administrative expense and distributions to shareholders.

Also, in terms of price/earnings ratio (P/E), Windstream outperforms the industry, with a P/E of 35.37 compared to the industry average of 25.48. This shows that investors trust the company and expect higher earnings growth in the future. This is very important for Windstream, given the company's debt concerns.

In my view, the most impressive figure on the table above is net income. Windstream has the highest net income of all its peers. For a company that carries around so much debt as a result of so many acquisitions, a high net income shows signs of transformation.

In conclusion, over the past few years, Windstream has faced delays in the effort to grow, mostly for being very acquisitive. Yet, investors seem confident in the company's strategy to be repositioned in strategic growth areas. This is further supported by the consensus EPS forecast of $0.09 for the Q3 2013 results that are expected on November 7, whereas the reported Q2 2013 EPS is $0.06. So, analysts expect an increase of 50% in Windstream's earnings per share. Windstream manages debt after all, and the company will soon be able to generate free cash flow and implement effective capital allocation strategies. Hold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Does Windstream Manage Debt After All?