Foolish Forecast: Citizens Communications' Margin Magic

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Rural communications provider and Motley Fool Income Investor recommendation Citizens Communications (NYSE: CZN) will be making the trek to the big city tomorrow to report first-quarter earnings. Let's call ahead and preview what's on tap for the company.

What analysts say:

• Buy, sell, or waffle? Citizens has 20 analysts that follow its progress. Out of these, seven rate the stock a buy, while 13 say hold the phone. No analysts currently recommend selling shares. In our Motley Fool CAPS investor database, 201 players have rated the stock, affording CZN a three-star rating.
• Revenues. On average, analysts look for Citizens to report $519 million in revenue this quarter, up 2.5% from last year.
• Earnings. The average analyst is expecting EPS of $0.16, slightly ahead of the $0.15 reported a year ago.

What management says:
Citizens is dealing with the same issue as competitors Verizon Communications (NYSE: VZ), Qwest (NYSE: Q) and AT&T (NYSE: T): Customers are dropping traditional phone service, hurting cash flows from this business. To make up for this loss, the company is aggressively cross-selling high-margin broadband service and promoting bundled services. The company acknowledges this trend thusly: "[R]evenues from data and internet services such as high-speed internet continue to increase as a percentage of our total revenues and revenues from services such as local line and access charges and subsidies are decreasing as a percentage of our revenues."

What management does:
CEO Maggie Wilderotter has produced great performance during her tenure at the company, as the improving margins in the chart below clearly show. While gross margin has only dipped slightly, operating and net margins have been growing steadily. This improved efficiency in the business is bringing more cash to the bottom line and to shareholders' pockets.

Margin	9/05	12/05	3/06	6/06	9/06	12/06
Gross	92.0%	92.2%	91.0%	90.9%	90.8%	91.5%
Operating	28.4%	29.4%	29.0%	30.1%	31.0%	32.1%
Net	7.0%	10.0%	9.7%	12.3%	16.4%	17.0%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Citizens produces enough cash to fund a recently announced $250 million share buyback plan and pay a quarterly $0.25-per-share dividend. With a current price around $15.70, that's a 6.4% dividend yield, for those of you scoring at home.

While Citizens doesn't quite carry rock-star status with investors, the company has demonstrated that it knows the rural communications business well enough to provide superior returns to shareholders. As long as the company shows that it can continue to attract new subscribers to bundled, premium services that offset core voice losses, investors should be very happy holding this shareholder-friendly telecom.

Dial up more Foolishness:

• Stocks That Pay You to Retire
• Citizens Communications: Cash Calling
• Citizens' Rockin' Margins: Fool By Numbers

Citizens Communications is a Motley Fool Income Investor selection. To see what other dividend-paying stocks will put cash in your pocket, take a free 30-day trial.

Fool contributor Dave Mock never had rock-star status, and never will. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool has a disclosure policy, but it has nothing to do with exposing body parts.