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Here's Why You Should Hold On to Windstream Despite Risks

Zacks Equity Research
Updated

Windstream Holdings Inc. WIN is seeking diversification from legacy telecom services to more business, enterprise, and wholesale opportunities. The company is also realigning its wireless network toward a software-centric model to meet increasing business demands and customer needs. Despite such positives, this leading rural local exchange carrier in the United States continues to suffer from losses in its wholesale business.

Let’s take a sneak peek into the company’s performance.

What’s Going in its Favor?

Windstream is seeking diversification from legacy telecom services to more business, enterprise and wholesale opportunities. To meet this end, Windstream has made a significant financial investment to upgrade the company’s network and product portfolio, including significant advances in software-defined wide area network (SD-WAN) capabilities and a new Cloud Core architecture. Additionally, the acquisitions of EarthLink and Broadview have also played a major role in boosting the company’s SD-WAN and cloud suite. Windstream has also inked a deal to acquire privately-held, New York-based competitive local exchange carrier (CLEC) — MassComm, Inc.  The company is trying to reduce dependency on consumer-based revenues and become a business and broadband-focused company while serving mainly rural consumers.

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Windstream is also realigning its wireless network toward a software-centric model to meet increasing business demands and customer needs. The company is transforming its product portfolio and network in an attempt to enhance customer experience. Windstream did not reveal the contribution of SD-WAN to its total revenues. However, in December 2017, it announced 500 mid-sized enterprise market customers for SD-WAN.

The company aims to focus on four aspects - providing cloud connectivity, elevating customer experience, enabling employee collaboration and enhancing security and compliance.

We appreciate Windstream’s focus on improving sales, cutting costs and pricing initiatives, which are expected to boost profitability and check churn. Investments made in data center and fiber expansion will give impetus to revenue growth in the coming quarters. Expansion of its metro fiber network business in newer areas and its aim to extend the deployment of G.fast technologies over traditional copper telephone wires bode well. Windstream is also focusing on optimizing its last mile network and in turn cut costs.

Estimate Revisions, Zacks Rank & Style Score

Current quarter sales and earnings per share (EPS) for Windstream are projected to rise 7.1% and 10.1%, respectively, on a year-over-year basis. 

The upward estimate revisions reflect optimism over the prospects of this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Additionally, the stock has an attractive VGM Score of B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.

Downsides

Over the past three months, Windstream has not performed well.  The stock price has declined 12.1% compared with the industry’s decline of 12.6% in the said time frame.

 

Windstream has been losing access lines, thanks to pricing pressure and fierce competition. The company is under pressure due to losses in the wholesale business. Being a local exchange carrier, Windstream is exposed to stringent regulatory measures by the Federal Communications Commission as well as state regulations.

Further, continuous investments in technology and network upgrades may dent the company’s earnings. Outdated network equipment has been the primary reason for discontinuation of the DSL (digital subscriber line) service in CLEC (competitive local exchange carrier) territories across 25 states.

Despite management’s efforts to modify the company’s financial profile, we are concerned about Windstream’s highly leveraged balance sheet.

Key Picks

Some better-ranked stocks in the broader Computer and Technology sector include United States Cellular USM, Harris Corporation HRS and Intel Corporation INTC. United States Cellular and Harris sport a Zacks Rank #1 (Strong Buy), while Intel carries a Zacks Rank of #2 (Buy).

The projected earnings growth rate (3-5 years) for United States Cellular, Harris and Intel is 1%, 6% and 8.4%, respectively.

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Harris Corporation (HRS) : Free Stock Analysis Report
 
Windstream Holdings, Inc. (WIN) : Free Stock Analysis Report
 
United States Cellular Corporation (USM) : Free Stock Analysis Report
 
Intel Corporation (INTC) : Free Stock Analysis Report
 
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Zacks Investment Research