Not Impressed With CenturyLink's Q3 Results

Nov. 4.10 | About: CenturyLink, Inc. (CTL)

About two weeks ago I wrote about CenturyLink (NYSE: CTL) and indicated that I thought there was still quite a bit of upside potential. CTL reported its earnings yesterday and, although the share price has been volatile, the markets seem to be reacting well to the earnings release. Where (at the time of writing) the broader S&P was down 1/3 of a percent, CTL was up nearly 1/2 percent. Likewise, since my initial article CTL is up over 5%.

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Share priceClick to enlarge

Despite the generally positive reaction, I am not too impressed by the results. In my initial article I said that the number we should be looking at is the change in subscribers. In general, we expect the phone subscribers to decline and the internet subscribers to increase. My thesis was that these numbers (as seen in Q3-09 to Q1-10) should begin to converge. In other words, I’m looking to see if the decrease in phone subscribers is being offset by the increase in internet subscribers. Unfortunately, the decrease in phone subscribers was near its highest levels, while the increase in internet subscribers was at its lowest level in the 5 quarters that I have on record.

SubscribersClick to enlarge

I’ve updated the (somewhat complex) chart from my last article. The bar portion shows the total number of subscribers and is broken down by phone and internet lines. We see that the total number of subscribers is generally decreasing. The line charts show the change period over period; anything below the white dotted line is a negative number. The chart shows that while the access/phone lines (pink line on the chart) remain relatively steady, the internet line (green line on the chart) has started to move towards the white line.

I indicated in my last article that Q2-10 seemed to be an outlier (where net 116 thousand lines were lost) and I hoped to see a return to the net numbers of Q4-09 or Q1-10 which had a net line loss of between 50 and 100 thousand. However, as reported CTL lost 111,000 lines in Q3-10 (loss of 140,000 phone lines and a gain of 29 internet lines). Even with internet lines offering higher margins, this no doubt has been a damper on CTL EPS.

CTL reported EPS of 83 cents or 7 cents less than the same quarter last year. That being said, the release is not completely negative. First, although earnings were lower than last year, they are above the previous quarter by nearly 4 cents. Moreover, the EPS are inline with the EPS of Q1-10, a quarter I noted as being generally positive. Likewise, CTL was able to beat the street’s 81 cent estimate of EPS.

CTL was able to achieve all this by continuing to cut costs. Where Y-o-Y revenue was down nearly 10%, costs were down by 7.4%. Moreover, the integration costs of the EMBARQ transaction continue to decline ($14.1M for this quarter) while the synergies continue to increase ($80M for this quarter).

The revenue per phone line and revenue per internet line each remain fairly constant. And CTL continues to generate exceptional cash flow. CTL generate $2.97 CFO per share and continues to hold nearly 81 cents a share of cash on its balance sheet. The company’s 72.5 cent dividend seems safe for another quarter.

Finally, CTL has revised it full year guidance and now believes that for the fiscal year it will earn between $3.30 to $3.36 a share. At its current market price of around $42.00, the company is trading at about 13x earnings. Although the P/E is starting to creep up CTL is still trading below many of its peers.

Although this earnings release was not as positive as I had hoped, I still like CTL as its dividend appears safe and it is trading at a relatively low valuation. However, I will start to monitor CTL a little closer.

Disclosure: Author is long CTL