Earnings Preview: Windstream Corp.

Windstream Corporation ( WIN - Analyst Report ) is scheduled to release its third-quarter 2012 results on Wednesday, November 8, before the closing bell. The current Zacks Consensus Estimate for the third quarter is pegged at 13 cents, representing an annualized decline of 34.01%.

With respect to earnings surprises, Windstream was always below the expectation of the Zacks Consensus Estimate in three out of the last four quarters with an average earnings surprise of a negative 9.58%.

Second Quarter Recap

On August 9, 2012, Windstream reported its second-quarter 2012 financial results. Adjusted earnings of 12 cents were in line with the Zacks Consensus Estimate. Adjusted earnings for the second quarter were down 37% from the year-ago earnings of 19 cents.

Windstream posted Pro forma revenue of $1,537.8 million in the second quarter, reflecting a 1.2% year-over-year decline, besides missing our expectation of $1,541 million. On a GAAP basis, revenue significantly grew 49.3% year over year.

During the second quarter, total access lines, which include voice lines, high-speed Internet and digital television customers dropped 3.6% year over year to 3.13 million. Windstream lost 28,700 access lines. Voice lines declined 4.2% year over year to $2.9 million.

Windstream added as many as 2,200 new high-speed Internet customers, bringing its total customer base to 1.36 million (up 1.9% year over year). Video customers increased to 441,400 from 439,300.

Agreement of Estimate Revisions

In the last 30 days, out of the 13 analysts covering the stock, none revised their EPS estimates for the third quarter of 2012. However, for the fourth quarter of 2012, out of the 12 analysts covering the stock, only one reduced the EPS estimate while none increased the same.

Similarly, for fiscal 2012, one out of the 14 analysts slashed the EPS estimate during the last 30 days, while for fiscal 2013, only one out of the 15 analysts covering the stock raised the EPS estimate over the same time period.

Magnitude of Estimate Revisions

During the last 30 days, thecurrent Zacks Consensus Estimate for both the third and fourth quarter of 2012 remained in line with the previous EPS estimates of 13 centsand 14 cents, respectively.

Likewise, for fiscal 2012, the current Zacks Consensus Estimate was at par with the earlier EPS estimates of 51 cents but for fiscal 2013, the current Zacks Consensus Estimate was a penny above the previous estimate of 57 cents.

Earning Surprises

In the previous quarter, Windstream reported EPS of 12 cents, which was in line with the Zacks Consensus Estimate of 12 cents. The current Zacks Consensus Estimates for the ongoing quarter reflects a 0.00% upside potential (essentially a proxy for future earning surprises) but the upcoming quarter contains a downside risk of 21.43%. Likewise, fiscal 2012 reflect a downside potential of 5.88% while fiscal 2013 generates a 24.14% growth potential.

Our Recommendation

We believe, Windstream is poised to gain from high-speed Internet services that are benefiting from increased market traction. Additionally, the company’s acquisition of PAETEC will also be aided by expanding service offerings, increasing wireless data backhaul services and offering managed services and cloud computing.

Further, Windstream’s deleveraging initiatives and refinancing activities are expected to generate healthy cash flows, subsequently attracting investors through a high dividend payout.

However, we remain on the sidelines due to competitive pressure from peers like Frontier Communications ( FTR - Analyst Report ) , a highly leveraged balance sheet as well as continued access-line erosion, which could partially be offset by broadband opportunities.

We are currently maintaining our long-term Neutral recommendation on Windstream supported by a Zacks #3 Rank (Hold).