Windstream Corporation (WIN), a fixed-line voice and DSL Internet services provider, reported first quarter 2011 results on May 4. Adjusted earnings per share were at par with the Zacks Consensus Estimate.
First Quarter Review
Windstream reported earnings per share of 19 cents, which excluded 14 cents related to merger and integration costs as well as the loss on extinguishment of debt. Including these charges, earnings plummeted more than three folds from the year-ago quarter.
Revenues declined slightly but surpassed the Zacks Consensus Estimate. The company experienced lowest access line losses in the quarter. High-speed Internet customers continue to increase.
Windstream had made significant balance sheet improvements in the quarter that will lead to greater flexibility, improved debt maturity profile and reduced cash interest expense going forward. The company has refinanced over $1.5 billion of debt, and shifted its $1.2 billion of debt maturity to 2020 at attractive long-term rates.
In addition, Windstream has raised its revolving credit facility capacity from $750 million to $1,250 million and extended the maturity to December 2015. Additionally, Windstream is deleveraging its business back to historical levels of 3.2–3.4 times from the current 3.6 times through EBITDA growth and modest debt reductions.
With several refinance activities as well as ongoing deleveraging plans, the company expects to save interest of at least $90 million in 2012 and beyond. For 2011, Windstream continues to expect total revenue to decline 3% or remain flat at $4.015–$4.140 billion. Adjusted OBITDA is expected to be $2.045–$2.105 billion, representing a range of a decline of 1% to a growth of 2% year over year.
Windstream increased its capital expenditure guidance for 2011 to $570–$630 million from its previous forecast of $520–$580 million owing to higher spending in fiber-to-the-cell projects. This represents an increase of 16–29% over the last year.
The company reduced its free cash flow expectation to $845–$965 million from $863–$973 million for 2011. However, the company raised its dividend payout ratio to 53–60% from 52–59%.
(Read our full coverage on this earnings report:Windstream Meets, Debts Hurt Profit)
Agreement of Analysts
The trend noticed over the last 30 and 7 days shows the analysts’ negative bias towards estimate revisions for the upcoming quarter and two fiscal years.
For the upcoming quarter, out of 15 analysts, 6 made downward revisions while 2 moved in the opposite direction over the last 30 days. The analysts’ estimates remain unchanged over the last 7 days.
For fiscal 2011, 10 and 1 analysts out of 15 made downward revisions over the last 30 days and 7 days, respectively. In the last 30 days, 2 analysts revised their estimates upward in the last 30 days but none moved in the same direction over the last 7 days.
Similarly, for fiscal 2012, out of 17 analysts, 9 and 1 revised their estimates downward over the last 30 days and 7 days, respectively. 3 analysts made upward revisions in the last 30 days while none moved in the same direction in the last 7 days.
The analysts are concerned about Windstream’s highly leveraged balance sheet. The company’s ongoing acquisitions to expand its coverage markets and subscriber count are vital for its survival in an industry that is consolidating.
The analysts believe the acquisitions have strained the balance sheet as the company is predominantly funding most of these with debt. Windstream had approximately $7.3 billion in long-term debt at the end of first quarter 2011 (up from $7.2 billion at the end of 2010 and $6.3 billion at the end of 2009).
Further, Windstream remains challenged by sustained erosion in voice access lines, due to stiff competition from cable and wireless operators that raises the analysts' concern for the company.
Magnitude –– Consensus Estimate Trend
The Zacks Consensus Estimate for the second quarter remained stable at 19 cents over the last 7 days but decreased by a penny over the last 30 days. The estimate represents a 6% decline year over year.
Similarly, for fiscal 2011, the Zacks Consensus Estimate remained static at 75 cents over the last 7 days but declined by a nickel over the last 30 days. The estimate represents a meager 2.34% decline year over year.
For fiscal 2012, the Zacks Consensus Estimate remained unchanged at 84 cents in both the last 7 and 30 days, representing an increase of 11.94% annually.
The analysts expect earnings to accelerate in the upcoming years. Windstream focused on data and business solutions through several acquisitions that will spur the company’s future growth. In 2010, the company had acquired NuVox, Inc., Iowa Telecommunications Services, Inc., Hosted Solutions Acquisition, and Q-Comm Corporation.
Going forward, Windstream will continue to focus on improving its top-line trends and optimizing the cost structure. In addition, the company continues to invest in fiber-to-the-cell, data center expansions, and other success-based initiatives over a couple of years. These investments along with recent acquisitions are expected to enhance Windstream’s long-term financial and operational performances.
Further, Windstream is making several refinancing and deleveraging efforts to alleviate its high debt level, which will likely generate some synergies in the form of lower cash taxes, increasing profitability in the long term. Windstream’s healthy free cash flow, mostly generated through the ongoing cost-cutting initiatives, will support the high dividend payout that is well above its Tier- 1 peers AT&T Inc. (T) and Verizon Communication (VZ).
Earning Surprises
With respect to earnings surprises, Windstream generated a negative average earnings surprise of 5.13% over the last four quarters, which suggests that it missed the Zacks Consensus Estimate by that measure over the last year.
However, the company is expected to generate fairly good results in the coming quarters with refinancing and deleveraging efforts, several acquisitions made in the last year and accelerated investments in the fiber-to-the-cell projects and data center expansions.
Neutral Recommendation
We remain on the sidelines due to competitive pressure, a highly leveraged balance sheet as well as continued access-line erosion, which are partially offset by a high dividend yield and broadband opportunities. We believe Windstream’s high-speed Internet and digital TV businesses are growing rapidly, boosted by aggressive bundled service offerings and promotional initiatives. Further, the company is expanding its coverage and speeds of broadband network that will fuel incremental revenue opportunities.
Hence, we are currently maintaining our long-term Neutral rating on Windstream supported by a Zacks #3 (Hold) Rank.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
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