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Another earnings miss was reported for Windstream Holdings, Incorporated (WIN) on Thursday, November 7, 2013, sinking the shares by over 6% from $8.60 pre-earnings to around $8.00 in the trading sessions since. While the sell-off suggests many investors are heading for the hills, the overall picture is one of great hope and promise for Windstream that requires closer examination to truly appreciate.

The Near-Sighted, Fine Details
Earnings for the quarter ended September 30th, 2013 were $0.05 per share, down from $0.08 for both the same quarter of 2012 and the average analyst expectation. Of note is the fact that free cash flow increased 54% year-over-year to $264 million, and that broadband revenues and enterprise customers rose 4% and 6% year-over-year, respectfully. This is in contrast to a loss of 112,500 voice line customers, approximately 6%, as rural customers transition from traditional landlines to cell phone usage, which Windstream does not offer. Typically, customers have to rely on competitors, such as AT&T (T), to fill this need, causing some uncertainty in Windstream's ability to survive in a mobile world.

The Hidden, Promising Details
While the earnings were a miss and were down from 2012, there is every reason to hold optimism in the company. First, the company's GAAP earnings were lower than expected due to the "after-tax loss on the early extinguishment of debt," among other growth and restructuring expenses. For example, the company recently completed construction on an 89,000 square foot data center in Chicago, IL, and a 22,000 square foot data center in Nashville, TN. The company is additionally constructing a 72,000 square foot data center in Charlotte, North Carolina, due to be finished by late 2013 or early 2014. Had it not been for these healthy, growth-oriented expenses, including $14.7 million in debt repayment, the earnings would have been $0.08 per share, meeting expectations and prior-year earnings.

Even in such case, it could be said that Windstream would have shown no growth, maintaining $0.08 per share in earnings compared to 2012, right? Not really. While traditional landlines continue to dwindle, enterprise customers are continuously growing each quarter and revenues continue to increase. With enterprise growth of 6% compared to 2012, and significant construction on modern data facilities to support future growth, there is every reason to believe that Windstream is unlocking a lucrative market to replace its dwindling traditional landlines. It is simply a sign of the times that landlines are reaching their demise, and is something that other competitors, such as AT&T and Verizon (VZ) have had to endure. Nothing new or unusual, and Windstream continues to serve the underserved rural population of the southern United States, which frequently has limited telecommunications service options.

The company also continues to secure significant contracts, including a very recent $12 million data, voice, and internet service contract for over 300 buildings operated by the Department of Veteran's Affair, with the possibility the contract could grow to $20 million worth of services over five years. The company is also approved to provide the United States Government Services Administration with similar services, in both instances providing Windstream a strong, reliable customer -- the federal government.

Dividend Concerns

Finally, the company's dividend of $0.25 per quarter has raised concerns time and time again of its ability to continue to pay out, in spite of competitor's dividend cuts to conserve cash. However, historically speaking, the company is improving its cash position and has reliably paid the same $0.25 dividend even in poorer cash standing. Morningstar reports that currently, the stock is roughly unchanged compared to years prior, in various factors such as price to book, price to cash flow, and price to earnings. In fact, price to earnings is roughly the same ratio as in 2011, and price to cash flow is roughly unchanged presently compared to 2012 and 2008. Further, the company has made every confirmation that the dividend will continue to be paid unchanged, every quarter, including its recent dividend announcement prior to earnings release maintaining $0.25 for the current quarter's payment. Despite the constant popular concern regarding a dividend cut, Windstream presents no evidence of such a cut, and I have every reason to believe they will continue to provide this great value to shareholders.

Summary

In conclusion, Windstream's earnings miss is really not so much a "miss" but rather the costs of transition. As enterprise customers continue to replace lost landline customers, and the company continues to build more infrastructure to supply the future wave of business customer demands, the company should appreciate nicely in the long term. An investor buying at the $8.00 level will be paid generously to wait for price appreciation in the coming year or more, as the dividend appears to be solid and trustworthy. Windstream is a buy for the patient investor.

Source: Windstream Did Not Miss Earnings - They Prudently Gained For The Future