Windstream Corporation (WIN) provides phone, digital cable, and high-speed Internet service to residencies and businesses in 29 states across the country. The company, which is headquartered in Little Rock, Arkansas, employs over 10,000 people and is led by President and CEO Jeff Gardner. This quarter, Windstream has seen improvements on its fiber-to-the-tower projections, increased revenue from its business offerings, and a growth in total high-speed Internet customers; however, these numbers are overshadowed by a 1% decrease in total revenue year-over-year and by a below-investment grade credit rating for its debt across the board.
According to the company’s third-quarter conference call, Windstream lost $11 million, or 3%, in consumer service revenues. Furthermore, voice and long-distance revenues decreased by $27 million (7% year-over-year) due to a decline in voice lines. Windstream also saw losses in switched access and USF revenues; in short, the company was not as profitable this quarter as it has been in the past.
That’s not to say Windstream hasn’t seen any success this quarter. Chief Financial Officer Anthony W. Thomas reports that the company’s business division realized a 2.3% increase in revenue; additionally, total product sales were up $2 million. Additionally, the past quarter saw an $11 million (2% year-over-year) drop in operating expenses despite a slight increase in the cost of products sold due to increased sales figures. Thomas also points out that, at the beginning of the year, the company only expected to deploy fiber in less than 50% of its towers through 2011 and 2012; however, as the year progressed and the company won more fiber-to-the-tower contracts, the company now expects that number to be closer to 90%. Though this is a positive, as a result, capital spending increased to fund these projects; the cost of these contracts is expected to land somewhere between $100 and $125 million. However, due to tax-saving initiatives taken on by the company, Windstream expects to see a slight tax refund, which should ease its financial burden in 2012.
Still, a major point of worry amongst the company’s investors is its enormous, outstanding debt. As of December 11, Windstream has a debt/equity ratio of 9/1; such debt is a contributing factor in its less-than glamorous credit rating from Moody’s, S&P, and Fitch, which handed out Ba2, BB-, and BB+ ratings, respectively. While the company’s credit rating is in the junk bond range, it should be noted that it is still viewed as a relatively stable asset by all three credit rating agencies. With share prices around $11.70 (down from $14 last year), the company pays a $1 dividend—or 8.50%-every year. This high dividend could be a red flag to many investors, as it points out the potential negative volatility in the stock.
In its business services division, Windstream saw success by acquiring PAETEC on December 1 of this year. The merger with PAETEC means that Windstream Corporation now serves 450,000 businesses with over 100,000 miles of fiber across North America. Windstream is very excited about the merger, as the company has significantly increased its coverage across the nation and services most of the Fortune 500 companies following the acquisition. Also, in early October, Windstream Hosted solutions launched its second-generation of the cloud computing platform. Interestingly, Windstream’s cloud platform is said to be significantly cheaper than a company’s cloud platform would be were that company to build the infrastructure on its own.
In the residential division, as a push to gain more subscribers, Windstream is currently offering homes with a $99 per month Triple Play package -- much like Comcast’s (CMCSA) XFINITY -- for phone, digital cable, and high-speed (3 mbps) Internet service. The package gives new subscribers a lifetime guarantee on the price as well as three free months of service.
As far as competition goes, Windstream cannot hope to stack up to its top opponents, Verizon (VZ) and AT&T (T). This quarter alone, AT&T added over 2 million wireless subscribers, allowing it to pass the 100 million subscribers mark. Verizon continues to outperform Windstream as far as subscriptions and stock value, and it sees most of its competition from AT&T. Of course, this is not to say that Windstream will not one day be a major competitor of AT&T or Verizon; however, at the moment, it appears that Windstream has quite a way to go before it can hold a candle to either company.
Windstream is a risky bet for investors with its alarming debt and overall decrease in share price as shown below:
However, an investor can take advantage of a collar and the company’s upcoming dividend to potentially generate a profit without incurring a significant amount of risk. A collar may be entered by selling a call option and purchasing a put option against an existing or purchased stock.
Using PowerOptions tools, a collar position was found for Windstream with an estimated maximum potential return of 11.4% and a small risk (actually no risk as of the writing of the article, but this will probably go away). The return estimates include receiving a $0.25 dividend on Jan 17, 2012 to stockholders of record as of Dec 30, 2011. The estimated return if the price of the stock remains unchanged on the ex-divided date of Dec 28, 2011 is 1.9%. The specific call option to sell is the 2012 Jan 10 at $1.78 and the put option to purchase is the 2012 Jan 11 Put at $0.10. A profit/loss graph for one contract of the position including the dividend is shown below:
Fees and commissions were not included, so your mileage may vary. To receive the dividend, an investor must purchase the stock prior to the Dec 28, 2011, ex-dividend date.
Disclosure: I am long WIN, and entered the collar mentioned in article.
