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A Stock to Watch in the Telecom Sector

By Adetokunbo Abiola - Sep 11, 2013 at 6:53PM

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After its second quarter report, is there hope for Windstream?

With Windstream (WINMQ) falling after its second quarter earnings release, it seems that investors are concentrated on unimportant issues. Total revenue and operating income declined year-on-year, but the company is poised to tackle this challenge. The core business and consumer broadband segments are expanding, and right now, Windstream is continuing to strike a balance between paying an attractive dividend and reducing its debt over time.

Customers are shifting to cloud technologies, leading many to suppose that Windstream will suffer the same fate as companies not adapting quickly enough to new realities. However, Windstream has started to compete within the cloud market. But it has not forgotten that it derives much of its revenues from the business and consumer broadband segments that are still growing. In a recent report, IDC is forecasting a 3.4% growth for the telecom services market for 2013.

This makes competitors, such as AT&T (T -0.38%) and Verizon's (VZ -0.22%), sweep of the cloud market in the telecom services sector not as important. Windstream opened three data centers in Chicago, Nashville, and Raleigh-Durham. They will provide capacity to meet the strong demand for data center services. However, the company's core business and consumer broadband business also offers opportunity. Windstream is smart to focus its resources in this sector.

Verizon and AT&T have engaged in resources in cloud deployments. While it will give them a boost in revenues, it will take focus away from land-line telecom services, which produces a high amount of cash flow without demanding large capital investment. Windstream is strong in this department, and this has allowed the company's operating margin to outpace AT&T and Verizon's.

While Windstream's total revenues declined 2% year-on-year, its strategic revenues, which consists of total business and consumer broadband revenues, grew 3% and represents 71% of the company's total revenues. A soft business sales environment and continuing pressure in the carrier transport business were among the reasons for the net decline. Within Windstream's core business, the business service revenues increased 2% year-on-year, the consumer broadband revenues rose by 6% year-on-year, and the total average revenue per customer increased 7 percent year-over-year.

Windstream's weakness
Windstream wholesale revenues saw a decline from the last year. The decline was a result of lower intrastate access rates and lower switched access revenues from declining consumer voice lines. However, the next year is expected to be better, with the company expecting to change focus. Windstream plans to sell services to multiple tenants looking to support ongoing demands for higher wireless data speeds. This is where its data centers will prove very important.

Previously, wholesale revenue depended on equipping tower sites with fiber; but with the completion of the build out for its partners, Windstream saw little activity in the sector. The only way for wholesale revenues to increase is for Windstream to sell services to tenants. If this succeeds, and the wholesale sector picks up, then it could provide a meaningful boost to Windstream's revenues.

There seems to be some doubt surrounding Windstream, and this is keeping its price down. However, the company operates a strong core business along with a sector that shows promise. The company has ample cash, and it appears that the short-term concern with its wholesale business is overshadowing the stability of its core business.

At the end of the second quarter, Windstream had a cash flow of between $860 million to $900 million.. Because of the cash cushion and the growing business and consumer broadband segments, there appears to be little downside. When the wholesale business begins to gain traction, I expect the stock will be much higher than it is today. And while we wait for this, the business and consumer broadband sectors will be growing. Windstream stands to gain on the growth of both its business and wholesale segments.

Bottom Line
Windstream's core business is growing. The next year will be a significant one for the wholesale business, and the success in selling business services to multiple tenants will be the real test for Windstream's strategy. Right now, the stock is trading at levels that assume that Windstream cannot grow its wholesale revenues. But this is not correct. The company is one of the promising stocks available; and in the long term, it will overcome its challenges.

Adetokunbo Abiola has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$44.09 (-0.22%) $0.10
AT&T Inc. Stock Quote
AT&T Inc.
$18.36 (-0.38%) $0.07
Windstream Holdings, Inc. Stock Quote
Windstream Holdings, Inc.

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