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Should You Hang Up on This Service Provider?

Sean Williams
November 12, 2012

Shares of Windstream (Nasdaq: WIN  ) hit a 52-week low on Friday. Let's take a look at how it got there and see if cloudy skies are still in the forecast.

How it got here
Didn't anybody tell Windstream that no one uses a landline anymore?

As one of the very few independent access line-based companies still in existence, Windstream's growth is dependent on voice, video, and broadband data packages. After reporting its third-quarter results late last week, it's not hard to see why few companies are clamoring for those wireline customers.

For the quarter, Windstream recorded a less than 1% decline in total revenue as it saw a 2% decline in digital television subscribers and a 4% reduction in voice lines. Helping pick up the slack was a 2% rise in its bread-and-butter broadband business, but that still didn't save the company from reporting a 1% decline in operating income before depreciation and amortization (a measure of profitability for telecoms).

As I noted on Thursday, Windstream's promotional pricing in order to draw in new accounts, as well as slow fiber-to-cell-tower growth, has hampered its recent results. Let's also keep in mind that Windstream's earnings were affected by $7.8 million in after-tax merger costs with PAETEC and $7.5 million for a recent restructuring which should save the company $40 million annually.

The primary problem for Windstream is that its only reliable customers are rural households. Far fewer homeowners are choosing to carry a landline phone given that cell phone coverage has expanded greatly over the past five years. As large telecom providers expand their coverage into more rural areas, this will shave even more off of Windstream's potential revenue stream. Just this past week AT&T (NYSE: T  ) announced it would be spending $14 billion on its wireless and wireline networks in an effort to cover as many as 300 million people by 2014.¬†These are the types of moves that'll cripple Windstream's growth potential.

We've also seen similar struggles from its peer Frontier Communications (Nasdaq: FTR  ) , which purchased access line assets from Verizon (NYSE: VZ  ) in 14 states three years ago for a hefty $8.5 billion.¬†Since then, Frontier has suffered through huge integration costs, an exodus of voice customers, and shareholders have seen its dividend cut twice.

What can turn its frown upside down
Oddly enough, Windstream is just the type of company that would benefit from a weak economic environment. Consumers with less discretionary cash are more likely to look for bargains among access line providers, which could play right into Windstream's hands. In addition, weak global growth is what's kept AT&T and Verizon from expanding their infrastructure into rural parts of the U.S. for years. I'm not advocating a recession, but Windstream would definitely fare better than many of its larger peers if one were to occur.

Windstream is also going to need its recent acquisition of PAETEC to pay off. PAETEC's enterprise-based cloud computing business might be the only shot of true growth that Windstream has left, although it needed to tack $1.4 billion of PAETEC's debt onto its own already bloated and debt-laden balance sheet to get its ha