Has Windstream Become the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Windstream fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Windstream.
What We Want to See
Pass or Fail?
5-year annual revenue growth > 15%
1-year revenue growth > 12%
Gross margin > 35%
Net margin > 15%
Debt to equity < 50%
Current ratio > 1.3
Return on equity > 15%
Normalized P/E < 20
Current yield > 2%
5-year dividend growth > 10%
3 out of 10
Since we looked at Windstream last year, the company has seen its score cut in half after having gained a point between 2010 to 2011. Despite a 25% drop in its stock price over the past year, weaker earnings hurt its returns on equity and P/E multiple.
Windstream has been an attractive choice for income-seeking investors for years. With its focus on serving telecom customers in rural areas, the company splits up the nation's hinterlands with Frontier Communications and CenturyLink , banking on residents' continued willingness to pay for landlines and other more technologically antiquated telecom services to bolster cash flow and finance outlandish dividend payments.
But the big question looking forward is whether Windstream can keep paying out big dividends. Looking at its net income can produce deceptive results, as even industry giants AT&T and Verizon have much greater free cash flow than their GAAP income figures would suggest. However, as Fool contributor Dan Radovsky discovered after Windstream's most recent quarterly report, by conventional definitions, Windstream didn't even produce enough free cash flow to finance its quarterly payout during the third quarter.
Windstream's primary strategy is to boost its focus on business customers, as well as offering higher-end services like broadband to residential customers. Yet the company has had to offer promotional pricing to entice buyers. Windstream is also looking to diversify into cloud computing services for businesses, but its recent acquisition of PAETEC needs to work well in order to spark growth for the company.
For Windstream to improve, it needs to get earnings growth moving in the right direction. Otherwise, Windstream doesn't have very good chances of ever becoming a perfect stock.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
Windstream and Frontier Communications share attractive dividends. But they both have the challenge of dealing with declining business segments and trying to find new business to replace falling customer counts. Find out how Frontier is handling the situation in our premium research report on Frontier Communications, in which we walk you through all of the key opportunities and threats facing the company, including competition from Windstream. Click here to learn more.
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The article Has Windstream Become the Perfect Stock? originally appeared on Fool.com.Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.