Is Windstream Undervalued?

With shares of Windstream (NASDAQ:WIN) trading around $8, is WIN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Windstream is a provider of advanced communications and technology solutions, including managed services and cloud computing, to businesses nationwide. In addition to business services, the company offers broadband, voice and video services to consumers in primarily rural markets. It has operations in 48 states and the District of Columbia, a local and long-haul fiber network spanning approximately 115,000 miles, a robust business sales division and 21 data centers offering managed services and cloud computing. A mix of fiber optic and copper facilities connect its customers with the core network. With operations spanning most of the country, Windstream is poised to continue to offer new age technology to an expanding user base in upcoming years.

T = Technicals on the Stock Chart are Weak

Windstream stock has witnessed a bit of selling pressure since its initial public offering in 2005. Any reasonable pop has been used as an exit opportunity for many investors. The stock is now trading near prices not seen since the financial crisis. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Windstream is trading below its declining key averages which signal neutral to bearish price action in the near-term.

WIN

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Windstream options may help determine if investors are bullish, neutral, or bearish.

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Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Windstream Options

35.22%

56%

51%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion…

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Windstream’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Windstream look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

87.50%

-40%

-52.63%

83.33%

Revenue Growth (Y-O-Y)

26.22%

51.71%

49.32%

51.03%

Earnings Reaction

-4.25%

-9.66%

-7.46%

-10.39%

Windstream has seen increasing revenue figures over the last four quarters while earnings have been mixed. From these figures, the markets have not been pleased with Windstream’s recent earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Windstream stock done relative to its peers, AT&T (NYSE:T), Sprint Nextel (NYSE:S), Verizon (NYSE:VZ), and sector?

Windstream

AT&T

Sprint Nextel

Verizon

Sector

Year-to-Date Return

4.83%

15.37%

26.19%

20.52%

13.37%

Windstream has been a relative underperformer, year-to-date.

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Conclusion

Windstream provides technology products and services to a growing user base in the United States and District of Columbia. The stock has been in a consistent downtrend for most of the last several years. Earnings and revenue figures are sending mixed signals but ultimately, investors are disappointed with what they have heard during earnings announcements. Relative to its peers and sector, Windstream has trailed, in year-to-date performance, by a wide margin. STAY AWAY from Windstream stock for now.

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