Windsteam Vs. Sprint: Which For Stronger Gains?

Mar.25.12 | About: Windstream Holdings, (WIN)

Windstream (NASDAQ:WIN) is a provider of advanced network communications including cloud computing and managed services to businesses in the U.S. It also offers broadband, phone and digital television services to consumers, primarily in rural areas of the U.S. Windstream is not a player in the wireless market. Sprint offers wireless and wire-line communications products for individuals, businesses, government and resellers. It offers wireless and wire-line services in the territorial U.S. Puerto Rico and the U.s. Virgin Islands. Its retail brands include Boost Mobile, Virgin Mobile, Assurance Wireless and Common Cents on 3G. Sprint has 4G wireless available in 71 markets reaching more than 110 million subscribers. This comparison will measure the ability for each company to increase its share price based on the value delivered to shareholders.

Windstream's common shares trade around $12, have a 52 week range of $13.57 and $10.76. It has a price earnings ratio of 36:75, earnings per share of $0.33 and a dividend yield of 8.20%. Windstream has total cash of $227 million and total debt of $9.27 billion. Its book value per share is $2.56. Market capitalization is $7.09 billion.

Fourth quarter results show total revenues were $1.6 billion in the quarter an increase of almost 1% over the same quarter in the previous year. Business service revenues were up 2.5% from the same period in 2010. Broadband revenues were up 7% from the same period in the previous year. Windstream acquired PAETEC a business service provider to the U.S. market in the fourth quarter of 2011. This acquisition added 36,000 miles to its network and seven data centers enhancing Windstream's service to business customers. Windstream invested in high growth initiatives by purchasing fiber to tower programs to serve wireless carriers' need for greater bandwidth to accommodate the increase in wireless data usage. The company capitalized on the growing demand for data management services by expanding to 21 data centers that offer managed services and cloud computing. Total revenues were $1.6 billion in the fourth quarter. Full year revenues were $6.2 billion a decline of 0.3% from 2010. Consumer service revenues were $341 in the fourth quarter down 2.5% from the same period of 2010. Full year business service revenues were $3.5 billion, an increase of 1.8% from the same period in 2010. Broadband revenues were up 7% from the same period in 2010. Full year broadband revenues were up 9% from the previous year. Business and consumer broadband revenues accounted for almost 67.4% of the company's total fourth quarter revenues.

Windstream ended 2011 with 1.9 million voice lines, down 20,000 from the year previously. Customer service revenues were down 2.5% from the same period in 2010. For the full year they were down 2.6% from the year 2010.

The company issued guidance for 2012 indicating a drop in revenues of 1%, and capital expenditures of $950 million to $1.05 billion. The company expects have capital expenditure in the area of $55 million in relation to the integration of its PAETC acquisition in 2011. Offsetting the PAETC expenditures, Windstream expects to receive $55 million in the first quarter of 2012 from the proceeds of the sale of spectrum assets acquired on previous acquisitions.

Windstream's closest competition is Sprint Nextel (NYSE:S) with a market capitalization of $8.66 billion, yearly revenues of $110.88 billion, earnings per share of $0.85. Sprint's common stock trades at around $3, has a year high of $6.45 and a year low of $2.10. It has negative earnings per share of ($0.97). The book value per share is $3.81. It does not pay a dividend. Sprint has total cash of $5.06 billion and debt of $177.42 million.

Sprint's fourth quarter 2011 results showed the largest sequential increase in operating revenues in more than five years as well as the highest service level of customers in the company's history. It added 1.6 million new subscribers in the fourth quarter, the best increase since 1995. Operating net revenues were $6.7 billion for the quarter, a five percent increase from the same period in 2010. The increase was due to a higher wireless service and equipment revenue which offset the decline in traditional wire-line revenue. Income was $842 million in the quarter compared to $1.3 billion in the fourth quarter of 2010. The decline was due to higher equipment subsidy and sales expenses, higher cost of wireless service and lower wire-line revenues. Capital expenditures were $900 million in the quarter compared to $608 million in the fourth quarter of 2010. Wireless capital expenditures were $774 million compared to $473 million in the same quarter of 2010. The company also invested in data capacity and IT infrastructure and wire-line expenditure in the fourth quarter. Sprint forecasts 2012 operating income between $3.73 and $3.9 billion and expects revenue growth of between 4% to 6% for the year. It also expects capital expenditures of $6 billion in 2012.

In February 2012, Sprint announced it was partnering with Orange Business Services to provide Sprint with machine to machine connectivity outside the U.S. This acquisition will expand Sprint's reach in machine to machine connectivity outside of the U.S. to 180 countries. This allows Sprint to expand the reach of its business customers beyond the U.S. in industries as automotive, healthcare, retail point of sale and security. Orange Business Services is an arm of France Telecom (FTE) a global integrator of communications solutions for multinational corporations.

Windstream is a regional carrier that is sticking to its knitting in providing services to rural areas and expanding its reach into the managed services markets through strategic acquisitions. It has made acquisitions that do not require the capital expenditures of the wireless market. It has made a foray into services the bandwidth for wireless customers but has not invested in wireless products and services to the degree that other players in the telecommunications space have. It has chosen instead to enter into the managed services market which will show a faster rate of growth and has to date delivered revenues that will add value in the long term. It is trading in the middle of its 52 week range. The dividend yield is high. Windstream's debt position is worrying, which is an indication that the dividend may be in danger of being reduced in the near term if revenues do not increase dramatically. The company will have to start delivering high returns from its managed services acquisitions as its wire-line revenues will continue to decline over time and its digital and broadband client base is finite in its current form.

Sprint continues to have visible brands in the wireless market and is making headway in terms of its reach internationally. Its partnership with Orange will contribute to its international reach. Returns from this partnership will offset some of the losses in the traditional wire-line market and the slow growth of the wireless market in the U.S. Sprint's debt position is better than Windstream's and it does not pay a dividend. It is likely that earnings will become positive in 2012. Sprint is trading below its book value. Its current fundamentals indicate that the share price has a better chance of increasing against Windstream's common stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.