Buy CenturyLink And Level 3 Communications As Sprint Bleeds Billions

| About: CenturyLink, Inc. (CTL)

As Sprint (NYSE:S) continues to bleed billions upon billions, investors should consider capitalizing off of industry consolidation elsewhere. Here are just a few options: (1) Go long CenturyLink (NYSE:CTL). CenturyLink has dramatically transformed its business from acquiring Qwest and Savvis. According to T1 Banker, it is rated near a "strong buy". (2) Go long Level 3 Communications (NASDAQ:LVLT). L3 is accelerating the top-line and is well positioned to reign in losses. L3's turnaround story is, in my view, more compelling than Sprint's. (3) Go long smaller players, such as AirTouch Communications (OTCPK:ATCH) and AltiGen Communications (OTCQB:ATGN).

CenturyLink trades at a respective 31.7x and 15.9x past and forward earnings with a stellar dividend yield of 7.5%. It is preferred over L3 and Sprint, which are both rated around a "hold". Based on my review of the fundamentals, however, the market is failing to fully appreciate L3's exceptional progress due to negative bottom-line losses. Whereas L3 is quickly transitioning into profitability, Sprint is expected to bleed even more this year than in the previous one.

At the fourth quarter earnings call, CenturyLink's management noted strong performance:

"First, we completed the acquisitions of Qwest and Savvis, adding strategic high-quality asset to CenturyLink, which further diversified our revenue mix, broadened our portfolio of assets that strengthen CenturyLink's position as a leading communications company. We've also added a global aspect to our business through these transactions.

Second, during 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".

Acquiring Qwest and Savvis doubled CenturyLink's enterprise and wholesale businesses in size while increasing global data center diversification. Fourth quarter margins may have seen margin erosion, but revenue challenges are being reigned in by strong execution. That is to say, management is well on the way to normalizing top-line trends. Phone losses have slowed since Qwest was acquired and customer metrics continue to improve.

Consensus estimates for CenturyLink's EPS forecast that it will decline by 10.1% to $2.40 in 2012 and then grow by 1.3% and 8.6% in the following two years. Assuming a multiple of 18x and a conservative 2013 EPS of $2.38, the rough intrinsic value of the stock is $42.84, implying 10.8% upside.

L3 accelerated sales to $1.6B, which represented a 71.4% y-o-y improvement. Although most of the growth cam inorganically from the Global Crossing acquisition, Global Crossing will be substantially accretive to value. I estimate that its integration will yield $300M worth of yearly cost synergies, expand international presence, and help improve the credit rating. Going forward, the company is well positioned to capitalize off of data connectivity.

Consensus estimates for L3's EPS forecast that losses will improve from $6.03 per share to only $1.63 in 2012 and then turn positive at $1.14 in 2014. As the company reigns in losses while Sprint struggles, investors are likely to benefit from high risk-adjusted returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.