Has Windstream Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Windstream (NASDAQ: WIN  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Windstream.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

12.4%

Fail

 

1-year revenue growth > 12%

44.1%

Pass

Margins

Gross margin > 35%

52.7%

Pass

 

Net margin > 15%

2.4%

Fail

Balance sheet

Debt to equity < 50%

735.9%

Fail

 

Current ratio > 1.3

0.50

Fail

Opportunities

Return on equity > 15%

13.7%

Fail

Valuation

Normalized P/E < 20

23.65

Fail

Dividends

Current yield > 2%

11.2%

Pass

 

5-year dividend growth > 10%

0.1%

Fail

       
 

Total score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Windstream last year, the company has seen its score cut in half after having gained a point between 2010 to 2011. Despite a 25% drop in its stock price over the past year, weaker earnings hurt its returns on equity and P/E multiple.

Windstream has been an attractive choice for income-seeking investors for years. With its focus on serving telecom customers in rural areas, the company splits up the nation's hinterlands with Frontier Communications (NASDAQ: FTR  ) and CenturyLink (NYSE: CTL  ) , banking on residents' continued willingness to pay for landlines and other more technologically antiquated telecom services to bolster cash flow and finance outlandish dividend payments.

But the big question looking forward is whether Windstream can keep paying out big dividends. Looking at its net income can produce deceptive results, as even industry giants AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) have much greater free cash flow than their GAAP income figures would suggest. However, as Fool contributor Dan Radovsky discovered after Windstream's most recent quarterly report, by conventional definitions, Windstream didn't even produce enough free cash flow to finance its quarterly payout during the third quarter.

Windstream's primary strategy is to boost its focus on business customers, as well as offering higher-end services like broadband to residential customers. Yet the company has had to offer promotional pricing to entice buyers. Windstream is also looking to diversify into cloud computing services for businesses, but its recent acquisition of PAETEC needs to work well in order to spark growth for the company.

For Windstream to improve, it needs to get earnings growth moving in the right direction. Otherwise, Windstream doesn't have very good chances of ever becoming a perfect stock.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Windstream and Frontier Communications share attractive dividends. But they both have the challenge of dealing with declining business segments and trying to find new business to replace falling customer counts. Find out how Frontier is handling the situation in our premium research report on Frontier Communications, in which we walk you through all of the key opportunities and threats facing the company, including competition from Windstream. Click here to learn more.

Click here to add Windstream to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2162494, ~/Articles/ArticleHandler.aspx, 11/22/2014 5:52:16 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement