Buying Windstream Stock: Analysts on the Fence

The aggressive acquisition strategy at Windstream Corp. has helped the telecommunications company enjoy solid growth, though analysts on Tuesday expressed concerns over its hefty debt load.

Zacks Investment Research maintained its neutral rating on Windstream, citing a number of pros and cons at the Arkansas-based carrier.

Several research firms are on the fence when it comes to Windstream. Of the firms tracked by Zacks Investment Research, 10 recommend a hold. Four recommend a strong buy and one recommend a buy on the stock.

In a research note Tuesday, Zacks noted that Windstream is funding most of its acquisitions through debt, which stood at $8.8 billion at the end of the first quarter of 2012.

Still, Zacks opined that Windstream’s strategies will continue to drive long-term growth. Analysts also predicted “healthy cash flows” and that the company would appeal to investors due to “high dividend payouts.” Windstream returned $509.6 million to shareholders last year through dividends, according to Zacks. In the first quarter of 2012, Windstream paid $147 million in dividends.

Nonetheless, the company faces challenges that include declining wholesale revenues and a continued erosion in access lines. In the most recent quarter, Windstream’s wholesale revenues declined 6.3 percent or $15 million compared to the year-ago basis on a pro forma basis. That was largely due to Windstream discontinuing and modifying certain wholesale products in the portfolio of PAETEC, which it acquired last year for $2.4 billion in stock.

In a regulatory filing on its first-quarter earnings, Windstream reported that consumer lines decreased 82,000 or 4.1 percent during the 12-month period ending March 31. Windstream primarily attributed the losses to “the effects of competition.”

In the face of such consumer access line losses, the company has shifted its sales to higher-growth areas. Business and consumer broadband revenues comprised 68.1 percent of its total revenues in the most recent quarter. That’s up from 59.6 percent in the same period the prior year.

“Through acquisitions Windstream has increased its exposure to business markets, positioning itself well for an eventual macroeconomic recovery,” wrote J.P. Morgan analyst Philip Cusick in a research note last month. “If macro trends were to improve significantly in 2012, Windstream could see meaningful growth on the business revenue front, and our current revenue estimates could be too conservative.”

J.P. Morgan has a neutral rate on Windstream with a price target on the stock of $12.00.

The size of Windstream has ballooned largely through acquisitions since it was created in 2006 through the spinoff of Alltel Corp. At the time, Windstream only offered services in 16 states; the company now operates in 48 states and the District of Columbia with 22 data centers and a long-haul fiber network spanning about 115,000 miles.

Since it missed analysts’ expectations in the first quarter, Windstream’s stock has fared relatively poorly. The stock (WIN; NASDAQ) was trading late this afternoon at $9.35, slightly better than a 52-week low of $9.00 reached on June 4, according to data from the New York Stock Exchange.

Windstream will hold a conference call on Aug. 9 to review its second-quarter earnings.

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