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On Dec 5, 2013 we maintained our Neutral recommendation on one of the major U.S. rural local exchange carriers (RLEC), Windstream Holdings Inc. (WIN - Analyst Report). Over the long term, we expect the company to grow on investments in fiber-to-the network and broadband network along with proper expense management and a capital-efficient business model.

However, a competitive market scenario and soft enterprise and carrier transport businesses remain concerns. The company currently carries a Zacks Rank #3 (Hold).

Why the Reiteration?

We remain optimistic on Windstream’s focus on expanding its service offerings to businesses with VoIP services, data bundles, cloud and managed services, data center co-location, fiber transport as well as increasing distribution channels. These are likely to return positive results in the near term.

Little Rock, Arkansas -based Windstream has been adding a number of data centers, rendering greater customer satisfaction, and investing in business channels. Windstream has opened three data centers so far this year and is currently building another one in Charlotte, NC. These units are being constructed to cope with the growing demand for data centers and cloud-based services from customers all over the nation.

The company continues to invest in long-term growth initiatives such as fiber-to-the-tower (FTTT) deployment and broadband network capability. With the rise in demand and contract wins, Windstream is ramping up its FTTT construction while with broadband expansion, the company is targeting to enhance its coverage and increase speed in various areas. Windstream plans to add 75,000 new broadband addressable lines through further investments. These initiatives are expected to be accretive to the company’s revenues.

On the flip side, Windstream’s carrier transport business continues to remain under pressure as the demand for dedicated circuits from telecom operators remain subdued. Furthermore, softer sales from enterprise business can hurt the company’s growth in the near term.

Windstream’s major risks also include access lines losses that are affecting its wireline business revenues. The company reported weak third-quarter 2013 financial results, with both the top and the bottom line failing to beat the respective Zacks Consensus Estimate. Loss of voice and digital subscribers along with reduced intrastate access rates affected the results.

A highly leveraged balance sheet is another concern for the company. These risks force us to maintain a neutral stance on the carrier.

Other Stocks

While we remain sidelined on Windstream, Zacks Ranked #1 (Strong Buy) Telenav Inc. (TNAV), Hawaiian Telcom Holdco Inc. (HCOM - Snapshot Report) and Shenandoah Telecommunications Co. (SHEN - Snapshot Report) look attractive for the short term.

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