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Windstream (NASDAQ:WIN) provides communications and technology solutions to residential and business customers nationwide, primarily in rural markets. The company's stock has fallen on tough times recently. After trading above $11 in the early part of May, and as high as $13.50 within the last 52-weeks, the stock is now under $10 after releasing disappointing first quarter results. It currently trades at a two-year low. Let's break down the company stats so I can tell you more about why I believe this is a strong opportunity to pick up shares of Windstream.

Did anything really happen in the last month to devalue the company by 20%?

In my opinion, the answer is a resounding "No". The company announced quarterly revenues of $1.55 billion, versus consensus estimates of $1.56 billion. Annualizing the company's recent dividend would put it at one dollar per share for all of 2012. At a current price around $9.50, that gives it an annual dividend yield of greater than 10%. Double exclamation point. In other words, if the share price can simply not decrease, a potential investor is getting a dividend that beats the long-term annual appreciation of the S&P 500 all by itself. So if Windstream's dividend alone is represents an adequate return on investment, the question then becomes can the stock stay flat, or even increase from its current trading levels? In this case, my answer is 'Yes'.

Rural is as rural does

Windstream is, to some degree, a niche player in the telecom industry, even for a company with a market capitalization of nearly $6 billion. Although the company now has at least some penetration into twenty-nine states, it does not get a lot of its revenues, by winning customers away from the likes of AT&T (NYSE:T) or Verizon (NYSE:VZ) in the Seattle-metro or Manhattan markets. Instead, it wins customers by offering service in areas of the country that Verizon and AT&T have never even heard of. I'm kidding, of course, I assume that executives at Verizon do know that life exists beyond the major metropolitan areas of the United States, but my general point is far from a joke: Windstream has differentiated itself, for the better, by focusing on a customer base that cable companies like Cablevision Systems (NYSE:CVC) and Time Warner Cable (NYSE:TWC) don't serve for the most part. I would argue that rural areas of the country are best poised for growth, having been slower to adopt high-speed internet connections.

No country bumpkin

If I'm making it sound like Windstream is managing to avoid Chapter 11 only because its competitors don't want anything to do with serving its rural customer base, I apologize. This is a company that knows what it needs to do to survive in the coming decade, recently announcing a home entertainment initiative that it refers to as 'Merge'. A Windstream customer subscribing to Merge will receive a Roku streaming box, free installation, and a free trial membership to Hulu Plus. Merge, along with adding another revenue stream, should position Windstream favorably in the industry, adding a valuable entertainment component to its pre-existing service.

Growth through smart acquisitions

Windstream completed its acquisition of PAETEC in the fourth quarter of 2011 at a cost of nearly $1 billion. The acquisition allows Windstream to profit from PAETEC's nearly 37,000 miles of installed fiber optic network and its seven data centers that will help in the company's push to gain "cloud" storage revenues from businesses. Windstream, like all telecoms, is losing wireline voice revenues with each passing quarter, as residential consumers decide to drop their home voice lines in favor of wireless. Replacing this revenue stream with higher-margin broadband and cloud storage is, I believe, an excellent decision for the company and will serve its business consumers well. Not only has Windstream replaced lower margin revenues with higher margin revenues in the deal, it also has stated that the merger will afford it about $100 million in annual cost savings. This should only further expand its operating margins, which are already ahead of most of its competition. Its reported 2011 operating margin of around 38% compares, during the same period, to 7% for AT&T, 12% for Verizon, and 13% for CenturyLink (NYSE:CTL). Operating margins, depending on what is included in them, can be a tough metric to compare across companies, but cutting costs is an area where Windstream has consistently been better than the competition.

Expensive, cheap, neither?

So, if Windstream offers such an attractive dividend, and its basic fundamentals appear strong, what about the stock price? Assuming it does not trade at a lofty multiple currently, we would expect the share price to hold up well in the next twelve months. The fact of the matter is that I don't believe that Windstream is particularly cheap or expensive at its current share price around $10. Its trailing twelve months (TTM) P/E ratio of less than 25, is probably right where it should be for a company that's been growing revenues at double-digits. Frontier Communications (NASDAQ:FTR) is a smaller competitor that has been growing faster than Windstream, and it has a TTM P/E ratio of around 28. CenturyLink, whose acquisition of Savvis has led to very strong revenue growth, has a TTM P/E ratio of around 42.

Outlook

I would be a buyer of Windstream at its current price of under $10. I expect price appreciation back to the early-May levels of $11.50 or so by the end of the year. When that share price return is combined with a projected dividend yield of over 10%, it makes Windstream a very attractive buy-and-hold stock. Windstream has a valuable niche market carved out for itself, and I'm not betting against its success.

Source: Windstream: This Dividend King May Hit $11.50 By 2013