There are a several factors to indicate that Windstream (NASDAQ:WIN) will continue steady growth throughout the next five years into a decade. Key elements to its success are the assertive grassroots approach to acquisitions and consistent management structure. Windstream has an innovative business model that continues to grow. Management has shown expertise and knowledge in this industry. Windstream is certainly not on par with AT&T (NYSE:T) or Verizon (NYSE:VZ) just yet but it will one day compete or be taken over as it approaches the level to compete nationally with the major brands.
This growing telecommunications provider continues to add value by acquiring rural communication companies and investing in cloud computing, data centers, VOIP services and fiber optic lines as well. Windstream is undervalued at approximately $11 per share despite its diverse and innovative approach to reach residential and commercial customers in various communities with an array of services. Eventually, it can easily double its stock price within the next five years. In less than 10 years, Windstream grew into a national commercial and residential provider from humble beginnings as an offshoot of Alltel residential services. This has been positive for the company so far, but acquisitions do carry cash flow and execution risks.
Approximately half of the stock is held by third party institutions. The high percentage of third party institutional ownership shows the value managers and funds still see in this mid-level telecommunications provider. Most analysts right now are advising to hold on this stock, however, buying shares now before corporate growth pushes the stock price higher than the current average is advisable.
Windstream represents the greatest opportunity for a growth stock in the telecommunications industry. It is reasonably undervalued and underpriced when compared to Verizon and AT&T but it is the most viable competitor to the major brands when I look at the smaller telecommunication providers. The stock price is relatively stable, even through the recession. The stock price ranges from $10.76 to $13.57 over the last 52 weeks. This stock price can easily double or triple in five to ten years' time under the same business model. The EPS is only 0.33, while the dividends are $1 per year. Windstream's main problem will be cash flow and debt in the upcoming years. The recent PAETEC acquisition for $2.3 billion and absorbed debt of $1.4 billion increased debt along with the revenue this past year.
It is easy to see Windstream spreading itself too thin for the sake of intrinsic growth. The stable management style, innovative business model and aggressive acquisitions can be the catalyst to make it through the upcoming debt and liquidity issues. If Windstream stays the course and does business as usual, it will continue to grow and find an acquisition to raise its value in the markets while expanding the customer base at the same time. If Windstream moves into more urban and suburban areas, sustainability is more probable. Acquiring a smaller provider like Frontier Communications (NASDAQ:FTR) and moving into the mobile phone market will help ensure growth into the next decade.
The edge Windstream has over the major brands like Verizon and AT&T is the focus in cloud computing services and fiber optic lines throughout the country. Investing in these technologies now, makes Windstream more equipped to compete in many of the underserviced markets now and into the future. Windstream can build a stronger place in the market as a valued third option by combining these services with cellphones and innovative releases like Merge. It can eventually pass Sprint (NYSE:S) as the third option for consumers in several years through effective acquisitions and management's consistent business model. Windstream will last as long as it mitigates the current cash flow and short-term debt issues from previous acquisitions long enough to build its market share to support revenues.
Current Outlook and Risk
The price of the dividend is in more danger than the future outlook of Windstream. The history of the corporation shows that it will eventually offset this inevitable decrease in dividends with an effective acquisition. Management has proven to be ahead of the curve and honed in on the most advantageous paths to take in order to steadily grow. The newest service called Merge was released in March 2012. Merge allows consumers to view social networking and gaming feeds on the television through the internet. The service also provides unlimited calling around the nation and provides domestic offices and employees for customer service and support. Focusing on the residential and commercial customer services as well as innovative technologies like data centers, cloud computing and fiber optic lines throughout the nation will make Windstream one of the leaders in the future of the telecommunications industry.
Windstream has a relatively inexpensive stock price on a growth basis, considering the size and scope of the telecommunications provider. It is currently valued at a premium, in comparison to its competitors. Its price to earnings ratio is approximately 34, opposed to the average price to earnings ratio of around 30 in the telecommunications and broadband industry. In terms of growth, however, Windstream is a more favorable choice than its peers in the telecommunications and broadband industry. Windstream's sales growth is 15.45%, which is higher than its peers in the industry at 11%. Windstream's price to earnings growth is also much lower at .51 opposed to the industry average of 1.37. Despite indicating growth, Windstream is at a premium for investors and it will see financial hardship if it strays from the business model that has worked adequately thus far.
Investors should also heed risks inherent in Windstream's strategy. Particularly, the company already has a significant debt load of $9.27 billion against $227 million in cash. I would be concerned but for Windstream's strong cash flow from broadband, which is $1.23 billion annually on an operating basis. In addition, the company has executed its past acquisitions well. The company, led by CEO and President Jeff Gardner, has built a strong management bench to guide the company's operations.
Most analysts have Windstream on hold, in light of the growing short-term debt and current lack of liquidity from large acquisitions. Windstream will sustain its growth and compete with the mid-level communication providers through the next five years. It will do this by adhering to its aggressive business model that focuses on quality acquisitions and technological innovations to increase market share and services to both residential and commercial consumers.