Telecom may offer attractive dividend yields, but uncertain end market demand and competitive pressures are major headwinds to value creation. Over the last six months, CenturyLink (CTL) has appreciated by 16.5% while Sprint (S) has collapsed by 32.8%. Based on my review of the fundamentals and multiples analysis, I expect CenturyLink to outperform its competitor.
From a multiples perspective, CenturyLink is not exceptionally attractive. It trades at a respective 32.2x and 15.7x past and forward earnings with a dividend yield of 7.4%. The company still has room for multiples expansion with a historical 5-year average PE multiple of 16.5.
At the fourth quarter earnings call, CenturyLink's management noted several areas of progress:
[D]uring the fourth quarter, we achieved operating revenues above the top end of our fourth quarter revenue guidance. And for full year 2011, we successfully lowered the rate of revenue decline to 3.8% from approximately 5.6% for pro forma full year 2010. We also successfully completed integration of Embarq and made solid progress with the integration of Qwest and Savvis while reaching our full operating expense synergy target for Embarq and exceeding our 2011 operating expense synergy target for Qwest.
From an operating metrics standpoint, the rate of access line loss in our business continue to decline in 2011, improving from 8% at year-end 2010 to 6.6% at the end of 2011.
Additionally, we experienced solid broadband subscriber growth of nearly 240,000 subscribers during 2011.
As a result of the Qwest and Savvis acquisitions, wholesale and enterprise revenues make up roughly one half of the business. Impressive execution remains to be seen as Embarq and Qwest have struggled to make an early move on the high-speed internet market. Management needs to prioritize improving its financial condition in order to dissipate concerns over dividend yield sustainability. At the same time, competitive pressures are offsetting improving customer metrics.
Consensus estimates for CenturyLink's EPS forecast that it will decline by 9.4% to $2.42 in 2012 and then grow by 1.2% and 9% in the following two years. Of the 17 revisions to estimates, 14 have gone down for a net change of -5.9%. Assuming a multiple of 17.5x and a conservative 2013 EPS of $2.42, the rough intrinsic value of the stock is $42.35, implying 7.9%.
Sprint faces even greater uncertainty. Fourth quarter revenue may have been in-line at $8.7B, but postpaid net additions were still very disappointing at 161K. Greater churn of 2% was largely involuntarily driven as a result of Radio Shack's (RSH) stricter credit policies. At the same time, management's attempt to shift iDEV subs to CDMA is doubtful. They are trying to retain a majority through the migration, but it looks they might have to settle for just half. Furthermore, the company is upwards of $3B short in financing for Network Vision. Cash burn is estimates at around $4.1B for this year and $700M more in 2013. With that said, Sprint has improved its ability to raise debt and has delivered impressive execution on iPhone sales.
Consensus estimates for Sprint's EPS forecast that it will decline by 61.4% to a loss of $4.12 in 2012, which will then improve by 32.4% and 88.5% in the following two years. Of the 28 revisions to estimates, 24 have gone down for a net change of -24.4%.