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Windstream's Spinoff Plan Keeps It Attractive Depite 65% Income Drop

NEW YORK (TheStreet) -- Telecom company Windstream Holdings (WIN - Get Report) reported a 65% drop in net income for the last quarter on in-line revenue.

Windstream said earnings, which missed estimates by 4 cents, included "after-tax merger and integration, restructuring and other expenses" that, if excluded, would have doubled earnings per share to 4 cents. Total revenue came in at $1.5 billion, a 2% decline from the same period last year.

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Windstream shares, at around $11.30, are up 41% for the year to date.

Windstream shares got a jolt late last month after the U.S. Internal Revenue Service approved the company's plan to spin off some of its assets into a real estate investment trust. The tax-free spinoff will enable Windstream to realize significant financial flexibility by lowering debt by approximately $3.2 billion and increasing free cash flow to accelerate broadband investments, the company stated in its earnings report.

This is where investors may turn their attention in the near future.

Its REIT plan is essentially a spinoff, which is very good for investors. According to Forbes, since the 2009 market bottom, the S&P 500 has gained 274% while the Guggenheim Spin-Off ETF (CSD) has gained 410%, vastly outperforming.

Windstream's move is another wrinkle in the tax avoidance plans being adopted by U.S. companies.

On Wednesday, Walgreen (WAG) announced it was buying the remaining 55% of European pharmacy chain Alliance Boots but in the process would not move its corporate headquarters in a tax inversion deal. The stock fell on the news.

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With inversion deals like Walgreen's falling apart, the Windstream spinoff plan should make the company's current weakness a compelling buy.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates WINDSTREAM HOLDINGS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate WINDSTREAM HOLDINGS INC (WIN) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its good cash flow from operations, solid stock price performance, notable return on equity and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Net operating cash flow has slightly increased to $319.80 million or 4.99% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -14.71%.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. In comparison to other companies in the Diversified Telecommunication Services industry and the overall market on the basis of return on equity, WINDSTREAM HOLDINGS INC has underperformed in comparison with the industry average, but has greatly exceeded that of the S&P 500.
  • Compared to its closing price of one year ago, WIN's share price has jumped by 37.08%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
  • The gross profit margin for WINDSTREAM HOLDINGS INC is rather high; currently it is at 52.84%. Regardless of WIN's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 1.09% trails the industry average.
  • WIN, with its decline in revenue, slightly underperformed the industry average of 2.6%. Since the same quarter one year prior, revenues slightly dropped by 2.1%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.

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