How Communications Sales & Leasing Inc. Lifted Windstream Holdings Inc. Out of a Deep Funk

These companies may be technically separated nowadays, but they still go together like milk and cookies.

Anders Bylund
Anders Bylund
Aug 17, 2015 at 3:00PM
Technology and Telecom
CSAL logo

Image source: CS&L

Communications Sales & Leasing (NASDAQ:CSAL) has separated from Windstream Holdings (NASDAQ:WIN). CS&L owns a plethora of telecommunications infrastructure, which Windstream uses to provide various communications services. No longer a united business, the two companies now keep an arm's length relationship, stitched together by long-term lease agreements.

But make no mistake: What's good for the goose is still extremely important for the gander.

This week, CS&L reported its first batch of quarterly results as a stand-alone company. The report pleased CS&L investors, sending the stock 4.7% higher by the end of the day.

You know who appreciated the strong results even more? Here's a hint: Windstream shares rose 6.9% on CS&L's earnings news.

In short, investors finally have some evidence that the new structure is working. Since Windstream and CS&L remain extremely close business partners, that simple fact lifts the value of both companies.

In the second quarter, CS&L recorded sales of $129 million. Windstream was the company's only customer in this reporting period. That may change in future quarters, according to comments made by CS&L CEO Kenny Gunderman in his first earnings call with analysts:

CS&L CEO Kenny Gunderman

CS&L CEO Kenny Gunderman. Image source: CS&L

Our strategy is to diversify our assets by owning mission-critical communications network assets, including additional fiber and copper, but also data centers, coaxial towers and other related assets. We also plan to diversify our customer base by leasing these mission-critical assets to credit-worthy customers over long periods of time.

Given these ambitions, Gunderman sees an addressable target market of at least 2,000 companies with operations in the general field of data and voice communications. "Needless to say, we believe our opportunity set is tremendous," he said.

Again, none of that potential expansion has happened yet, and Windstream consumes all the assets at CS&L's disposal. Finding new clients will require building out fiber and copper networks beyond the needs of Windstream alone. The company is reportedly talking to more than 100 potential customers, partners, and/or acquisition targets at the moment. Stay tuned as CS&L's non-Windstream growth strategy develops. These are very early days.

CS&L saw basic earnings of $0.05 per diluted share. The company landed $0.48 of adjusted funds from operations per share, or AFFO per share. This is an adjusted profit metric commonly reported by real estate investment trusts such as CS&L. When analysts start paying attention to this stock -- which they really haven't yet -- their reported earnings targets should be compared to CS&L's AFFO per share results.

On that note, CS&L issued AFFO guidance for the full year, setting a very narrow range around $1.74 per share. The handful of analysts offering projections for that period are currently looking for just $0.26 per share. But then, they set these full-year targets in the dark, with no reported results or management guidance to serve as a foundation. Expect these targets to get adjusted upward in short order.

Following CS&L's encouraging report and Windstream's own analyst-stumping earnings, Windstream's shares have bounced strongly off rock-bottom prices. The stock has now gained 26% since Aug. 5 -- just before Windstream's earnings report -- while CS&L has climbed just 4.6% in total. There's still plenty of room for improvement. Even after this bounce, Windstream shares have lost 39% of their value since spinning off CS&L, and the asset manager's stock is down by 19% since inception.

Investors should also pay attention to a rapidly changing dividend picture. Windstream is still committed to a $0.60 annual payout per share while CS&L targets $2.40 per share. For a short while, both of these policies amounted to dividend yields of roughly 11.5%. Today, CS&L's yield remains north of 11% while Windstream's backed off to 7.3%.

That's more in line with how management always planned the separation: One generous dividend tied to slow-moving REIT assets and one lower-yield telecom services stock with higher growth expectations. CS&L's growth ambitions might thwart that plan again by growing too fast -- but that's obviously not going to be a problem for investors.