Windstream: Underestimated By Analysts

Jul. 9.12 | About: Windstream Holdings, (WIN)

Windstream's stock price has been highly volatile over the past several years. There are two big reasons for this. First, the company has seen its debt load increase steadily over the past several years. Second, increased competition from CenturyLink (NYSE:CTL), Frontier (NYSE:FTR), AT&T (NYSE:T) and Verizon (NYSE:VZ) have given investors mixed feelings about the ability of Windstream to grow its market share. Windstream's debt has increased from $6.27 billion at the end of 2009 to $8.97 billion currently. Will this debt, which was incurred through acquisitions, equipment purchases, and network expansion pay off? This is what concerns investors most.

Throughout May, Windstream (NASDAQ:WIN) was both upgraded and downgraded by a variety of analysts. Oppenheimer stuck to its predictions of a good year for Windstream and kept its "outperform: rating. JPMorgan, meanwhile, lowered the company's price target from $14 to $12, but kept its ratings at "neutral." Those tracking the company at Stifel Nicolaus upgraded Windstream from :hold" to "buy."

How should investors interpret these conflicting stock ratings? I think investors should take stock ratings as they come and review how analysts reached these conclusions and the influencing factors behind the variety of opinions before making any hasty decisions. Analysts can only predict what they think will happen, not eventual outcomes. Still, investors should carefully consider the reasons behind why analysts assign a particular rating. In JPMorgan's case, at the time, Windstream was down 15% since the end of the first quarter, and the firm doesn't think this will change much in the near future. However, in a recent S&P survey, analysts still remain conflicted about Windstream, with some analysts saying to hold, others to buy, and still others on the fence giving the stock a 'buy/hold' rating.

Latest Developments

Varied stock ratings haven't stopped Windstream from continuing its country-wide expansion efforts though. Recently, the company announced plans to create a computer network for Richmond public schools throughout the city of Richmond, Virginia. The new network will consist of 87-miles of fiber optic cable that will allow schools to better communicate with each and with students and faculty.

In addition to providing network connectivity to an entire school system, Windstream was also chosen by box manufacturer Pratt Industries to create a management network that will allow the company to effectively communicate with its 72 locations throughout the U.S.

In addition to reviewing stock ratings, stock price fluctuations, and dividend yield percentages, investors need to also look at what a company does on a daily basis to expand service, build a reputable brand, and how it manages its existing workforce. Investors should also review quarterly cash flow statements to determine how much money the company has available to spend to maintain profits. As of the end of Q1 2012, Windstream has 438.8M in net operating cash flow. This is an increase of 129.1M from Q4 2011.

At the beginning of June, Windstream announced it would cut 375 to 400 management jobs from its operations. And while job cutting could be seen as a potential risk for investors, it's important to take a look at why the cuts were necessary, and how Windstream plans to use the money saved in payroll expenses. Cutting these jobs will increase net operating cash flow, which will only benefit the company and its investors in the long run as the company will be better able to invest in other areas such as research and development, marketing, or expansion into new territories.

Windstream has also been targeting small to medium sized businesses for growth. The company recently released a professional bundle of business grade internet service and unlimited phone service, along with a host of other features. By offering this package, Windstream is helping businesses cut costs. This is a high growth area, because many businesses are still reluctant to hire given the weak jobs data released over the past week. The reluctance to hire highlights the need to keep costs as low as possible.

Is Windstream a viable investment going forward? For the reasons listed above, I believe this stock will show significant improvement and increased stability in the coming quarters.

What's the Competition Up To?

As stated earlier, another area of interest investors should focus on is Windstream's competition. As the company expands, it will face increasing pressure from companies like AT&T, Frontier, Comcast (NASDAQ:CMCSA), Verizon, and CenturyLink. Each of these companies provides high-speed Internet, networking, and other services to businesses and residential customers. All of these companies have expanded in to new territories with the hopes of increasing their customer base.

Frontier, for example, has not only begun expanding services in rural areas of West Virginia, but may increase its expansion in rural areas of Minnesota along with CenturyLink if the companies accept funds offered by the FCC to follow-through with Internet service expansion in areas already receiving Frontier and CenturyLink phone and cable services.

Comcast is also targeting rural areas in West Virginia and has recently teamed with Verizon to promote each other's products and services in Michigan. Partnering with another telecom company has its risks, but the payoff includes larger territories and more long-term customers for both companies.

With Windstream making cuts to its management staff, investors need to consider the possibility that the company may have to slow its expansion efforts, giving the competition room to swoop in and take potential Windstream customers. On the other hand, increased competition provides customers with more service options, and forces companies to improve customer service and products.

Insider Buying

One other indicator investors should consider when contemplating investing in companies like Windstream is how often employees invest in their company's stock. It was recently reported that Windstream CEO Jeffery R. Gardner purchased over 31,000 shares of Windstream stock - this is a sign that Windstream is remaining strong, despite the cuts to management. However, investors should also question when employees sell stock shares, as this could be a sign of something amiss that may eventually affect the stock price.

More than Just Ratings

What's important is that while investors should review analyst opinions, they need to also conduct their own research to determine how safe they feel in investing for the long term. Windstream is affordable and pays a higher-than-average dividend, which is also very attractive. Unfortunately, job cuts and territory expansion each pose risks that could affect investors over time.

I think, however, that Windstream is a good investment option for those that want to hold onto the stock for a long time, even though the company has seen its share of ups and downs as seen in its quarterly income statements for the past year. For example, the company's Q1 2011 net income was $23.5 million, $93.2 million (Q2), $71.5 million (Q3), -$16.7 million (Q4), and $63.6 million for Q1 2012.

The company has also seen net margin growth of 4.12% and net income growth of 480.84% between Q4 2011 and Q1 2012. It is because of wild numbers like these that Windstream receives varied stock ratings, and why I think investors should stay for now - even if the numbers continue to fluctuate because overall, the telecom market is a sound market to invest in at the moment. With a variety of new products, increased customer demand, and lots of money to be made, investors should remain very pleased with their investment choices.

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