Is WindStream a REIT or Growth Stock?

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As of the end of 2013, Windstream Holdings (WIN) was a communications company that focused on providing wire line and wireless services primarily to rural areas within the U.S. Over the past several years, WindStream has acquired several small telecommunications companies, worked to increase returns through expense savings and expand its service offerings to customers by offering service bundles such as combined broadband and digital TV to increase revenues.

windstream-win-stock-dividend-stocksWindStream’s strategy is to continue to increase network performance in order to provide advance solutions to customers and increase broadband speed and capacity and move away from traditional consumer voice services. In addition, WindStream has sought to diversify revenue stream to alleviate revenue losses caused by a declining consumer base and inter-carrier compensation reform.

In an effort to execute this strategy in mid-2013, WindStream created a holding company and in July of this year announced the spin-off of WindStream’s network assets into an independent, publicly traded real estate investment trust (REIT). WindStream will lease the assets of the REIT back at a $650 million annual rate, fixed for three years with an annual rent escalation of 0.5% thereafter.

WIN – Earnings Summary

In the fourth quarter of 2013, WindStream saw total revenue drop 3% to $1.5 billion and declined 2% to $6 billion for full year 2013 revenue. Windstream reported revenue growth within the business and consumer broadband services of 2% customer offerings, which represent over 70% of WindStream’s revenue, but were more than offset by declines with the wholesale and consumer services revenue primarily due to lower switching and interstate access revenue. In the face of declining revenue, WindStream was able to control expenses and reported $2.32 billion in Operating Income Before Depreciation and Amortization (OIBDA) for 2013, or 39%, and $576 million in profits for the quarter.

For the first quarter of 2014, WindStream saw total revenue continue to decline by 2% to $1.5 billion with an OIBDA of $540 million and confirmed previously issued financial guidance for 2014. In the second quarter of 2014 WindStream saw revenue decline 2% to $1.5 billion with growth in data and integration services, data centers and business services offset by decreases in carrier revenue. OIBDA for the second quarter was $543 million.

REIT Carve Out Will Add Transparency to Business

With the REIT carve out, WindStream intends to cut its dividend to 10 cents a share with the spin-off REIT paying 60 cents a share assuming a 1 to 1 share exchange, making the current dividend yield of nearly 10% unrealistic for the management services portion of the business on a go-forward basis. Investors appear pleased with the decision to split the company, with a significant pop in WindStream’s stock price after the announcement. Even with dismal performance within the overall market recently WindStreasm is still up over 25% year to date.

WindStream Stock Price

Source: Yahoo Finance

The 12-month consensus analyst price target of $11 is close to WindStream’s current market price. It is hard to determine if WindStream is over valued at this time as I would typically value a REIT on net asset value and multiple of funds from operations basis, but WindStream is not reporting operations in that way yet. WindStream’s price to earnings (P/E) ratio is 34.4, compared to the S&P 500’s P/E of 18.4 which makes WIN stock look very expense. Conversely, WindStream’s price to cash flow is 4, compared to the S&P’s P/E of 11.2, which makes it appear a great value.

As individual investors, I would only look at WindStream as two separate companies going forward: a REIT that will be suited for yield focused investors and a growth focused operating company. I think current investors will enjoy lower taxes that will be provided by the pass-through structure of the REIT and have upside potential in the new management company stock.

New investors should wait until one or two quarters after the transaction to evaluate a potential purchase of the operating company to see if management can turn this new structure into a growth play and income investors should evaluate the REIT separately as well.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.  


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/windstream-reit-growth-stock/.

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