CenturyLink to Underperform - Analyst Blog
July 13 2011 - 10:52AM
Zacks
We are downgrading our long-term recommendation on
CenturyLink Inc. (CTL) to Underperform from
Neutral.
Although the third-largest U.S. landline operator continues to
grow its broadband customer base and associated revenues, it
remains challenged by the decline in fixed voice access lines. The
company faces intense competition from cable TV operators who are
aggressively offering traditional voice service through their
networks.
The company’s first quarter earnings also failed to impress.
Earnings per share surpassed the Zacks Consensus Estimate by 4
cents aided by the synergies from Embarq but fell year over
year.
Revenue remained depressed year over year due to access line
losses, lower access revenues and migration from fixed lines to
wireless. Total access lines dropped 7.5% from the year-ago
quarter.
Acquisitions and mergers will provide CenturyLink a competitive
edge over its two major rivals –– AT&T
Inc. (T) and Verizon
Communications Inc. (VZ). While the merger with
Embarq and Qwest as well as the pending Savvis
Inc. (SVVS) acquisition may yield a number of operational
benefits and cost synergies, significant integration challenges may
impede future operating performance.
The integration of Qwest will incur approximately $650 million
to $800 million of operating costs over three to five years and
approximately $150 million to $200 million of one-time capital
costs. CenturyLink has to integrate several systems and procedures,
including re-branding, billing, management information, purchasing,
payroll and benefits, fixed asset, lease administration and
regulatory compliance. In addition, the combined company will have
to expand its services to large urban areas where CenturyLink has
limited operating experience.
Moreover, the company continues to operate with a high debt
level (roughly $7.2 billion), which is further burdened by the
assumption of approximately $5.8 billion in Embarq debt. The Qwest
buyout will significantly increase CenturyLink’s debt, thereby
further impairing its balance sheet.
CenturyLink remains focused on investing in broadband services
to expand network capacity and on improving returns to its
shareholders through healthy dividend payouts. Over the last five
years, the company returned almost 28% to its shareholders in the
form of dividends. The company paid approximately $878 million in
fiscal 2010 through cash dividends with a 54% payout ratio.
However, this is considered to be the lowest payout ratio in the
industry.
However, for the short term, the stock retains a Hold rating
with a Zacks #3 Rank.
CENTURYTEL INC (CTL): Free Stock Analysis Report
SAVVIS INC (SVVS): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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