Windstream: Sell This Stock If Interest Rates Rise

| About: Windstream Holdings, (WIN)

Windstream's (NASDAQ:WIN) traditional market has been internet broadband service and land-based telephone services to the underserved areas in rural communities. It was a niche that served it well, allowing it to thrive among its much bigger competitors, such as Verizon (NYSE:VZ) and AT&T (NYSE:T).

Having over 100,000 route miles, a good portion of which it obtained through acquisition of smaller companies, gives Windstream an established and robust, broadband infrastructure. Windstream has some definite strong points to recommend it to investors, as well as areas of weakness and market vulnerability. A basic SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis is a good way to assess whether or not Windstream is an attractive near, or long-term, investment opportunity.

Windstream's Strengths

Clearly, Windstream's long-range, strategic plan, and its thoughtful execution by the company's management team, is Windstream's biggest strength. Recognizing the consumer's shift away from land-based to wireless devices, Windstream has an aggressive, targeted acquisition program to help it grow new lines of related business and revenue. Capitalizing on its already-established network of broadband, fiber-optic cable, Windstream has geared its acquisitions to include the expansion of its broadband services, and open new opportunities with "cloud computing" and data recovery services.

By pursuing these new lines of business, Windstream is now operating in the suburban market as well as the rural markets which made up its traditional, core business. Following its strategic plan, Windstream has completed twelve acquisitions since calendar year 2007. All but one appears to have been selected for their broadband capabilities. These acquisitions, starting in May, 2007 with CT Communications to the most current acquisition of PAETEC Holding Corporation, have increased Windstream's bandwidth offering to an almost unlimited capability, and in a time frame much shorter than it would have taken to build, (or negotiate a lease for), the infrastructure on its own.

Windstream's Weaknesses

Windstream's strength of a carefully planned acquisition strategy is also the major contributor to its biggest weakness, which is a large debt load. In a comparison of the debt to equity ratio of the sixteen largest telecommunication companies, Windstream ranked fifteenth, coming in with a debt to equity ratio of 6.108, compared to Verizon at .584 and AT&T at .6247.

Another weakness is the same one facing one of its large competitors, AT&T. This is the loss of business for its access lines, which is basically land-based telephone service, to the wireless market as more and more homeowners turn off their land lines in favor of just using their cell phones. Over calendar year 2011, Windstream saw a 4% increase in its high-speed internet customers, with an equal 4% decline in its original core business, land line customers. For the residential telephone and internet business, Windstream is basically treading water.

Windstream's Opportunities

The opportunity Windstream is pursuing is in cloud computing. The size of the cloud computing market is estimated to be at $150 billion by calendar year 2013, with 60% of the servers virtualized by calendar year 2014 (compared to 12% in calendar year 2008). With that kind of market growth, Windstream has positioned itself to chase the enterprise cloud market, for business data storage. Many companies, both established and start-ups, amass and require access to large amounts of data. This data requires storage, which means hardware and computing infrastructure, which is often difficult to size correctly for future needs, and is expensive to purchase and maintain.

Windstream is seizing the opportunity of offering data center services, aimed at reducing the hardware acquisition, storage and maintenance costs for companies. With its available, unlimited broadband width, it completed its last step for this strategy by acquiring Hosted Solutions in November, 2010. Hosted solutions had two, large, secure and certified data centers, one in Raleigh, North Carolina and the other in Boston, Massachusetts. Both data centers specialize in enterprise cloud computing. With this acquisition, Windstream has placed itself squarely in the game to grab a share of the $150 billion market.

Windstream's Threats

The possibility of rising interest rates needs to be watched very closely with any company that has a large amount of debt. Debt is due to borrowing, and the amount paid to service that borrowed money is dependent on the interest rates. Because it has such a high debt load, and its debt outstrips its cash reserves, Windstream is vulnerable to any upward change in the interest rate.

Also a clear, serious threat to Windstream's strategic plan is the competition. Windstream has wisely decided not to compete in the wireless cell phone market for the general public as Verizon, AT&T and a number of other carriers have a huge head start on it. But it is still dependent on its internet broadband customer service base growing, to offset the loss of its landline customers.

Verizon has 108.7 million cell phone customers and 8.7 million internet broadband customers, swamping Windstream's market base in the internet access market. The sheer size of Verizon will confine Windstream to its more rural and regional markets, and limit its growth potential. With Verizon trading at $40 per share on an average volume of 14.9 million, it is not likely Windstream (trading around $11 per share on a volume of 6.5 million) could be anything but a niche competitor in the internet access market.

The same story applies to AT&T, but with a more ominous twist. Trading at $33 per share on a volume of 27.3 million, AT&T has 103 million wireless customers, and more importantly, offers enterprise cloud computing services, which puts it in direct competition with Windstream's developing new revenue streams. So is Amazon (NASDAQ:AMZN). The company is pouring millions into the infrastructure of its Amazon Web Services (AWS), which generated an estimated $750 million in revenue in calendar year 2011, and is set to keep growing at an astonishing rate, with projected revenue of $2.5 billion in calendar year 2014 for its cloud computing services. Start-ups should also not be counted out. Virtustream, a new up-and-comer, recently acquired Enomoly in February, 2012, solely for its enterprise data storage capabilities. It looks to be on track to grab its own piece of the virtual storage market.

Overall, with the indirect hardware costs (maintenance, testing, redundancy capability, special housing requirements) that come with keeping servers at a company's site, I think it is a very safe bet that enterprise cloud computing, which is more cost effective and efficient then most in-house data centers, has a great deal to offer any company that requires data to run its business, but is tired with the cost of dealing with hardware and software engineers for maintenance, when information technology is not their core business.

Given that scenario, Windstream has picked a good market with plenty of room for growth for all, at least for the next few years. It should be a reasonable bet for investment. This is especially true as Microsoft (NASDAQ:MSFT) rolls out its Windows 8 software in the fall, which will make cloud computing much more attractive for businesses and personal consumers. However, don't forget the large debt load, and keep an ear open for any whispers of rising interest rates. Unless it takes a drastic drop in its debt to equity ratio, a rising interest rate may be a clear indication that it's time to sell Windstream stock.

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