Better Buy: Windstream or Level 3 Communications?

In this Motley Fool series, we pit two stocks against each other on five criteria to determine the better buy.

Today's matchup features two communications companies, one old school and one new school.

Windstream Corp. (Nasdaq: WIN) provides telecom services to rural areas in the U.S. while Level 3 Communications (Nasdaq: LVLT) provides its communications services via the Internet.

Using five short-of-scientific-but-carefully chosen criteria, let's determine which is the better buy.

Round 1: Balance sheet
Both companies hold significant amounts of debt, but that's common in the industry; Verizon (NYSE: VZ), AT&T (NYSE: T), and Qwest (NYSE: Q) all have significant debt loads. However, Windstream at least covers its interest payments with its earnings before interest and taxes (EBIT). Level 3 can't because its EBIT is negative. Advantage: Windstream.

Round 2: Operations
Windstream's return on equity over the past 12 months is 102%. Yowza! This is largely due to the leverage we talked about earlier. Its free cash flow is pretty strong and is much more impressive than Level 3's. It allows Windstream to pay an 8.8% dividend yield. Advantage: Windstream.

Round 3: Safer bet
Which company will put you in a better position to "never lose money" (as super-investor Warren Buffett says)? So, of course, Level 3 is losing money. That doesn't bode well. But Windstream does landline phone services (with bundled high-speed Internet and digital TV services). Similar to its close comparable Frontier Communications (NYSE: FTR) and the rest of the landline phone industry, negative growth is likely Windstream's future, but it's priced right and paying that sweet dividend. (As an aside, Frontier's dividend, though recently reduced, is even bigger). Advantage: Windstream.

Round 4: Sexier bet
On the flip side of safe is sexy, the upside growth potential. What makes Windstream the safer bet makes it the less sexy bet. Level 3's sales have been down recently, too, but it gets the sexy nod by default. If Verizon, AT&T, and maybe even Qwest were in this head-to-head, one of those would eke out sexiest. After its recent deal with Verizon, Frontier would, too. But they're not, soooo ... Advantage: Level 3.

Round 5: CAPS rating
Our CAPS community rates Level 3 a middling three stars (out of five). Windstream gets four stars. Advantage: Windstream.

The blow-by-blow recap

There you have it. Windstream beats Level 3 Communications 4-1, making it our better buy. I've got Windstream on my watch list (as well as Verizon, AT&T, Qwest, and Frontier). But what do you think? Vote in the our Motley Poll. Then share your thoughts in the comments section below.