CenturyLink: A Strong Call In 2012

Mar.25.12 | About: CenturyLink, Inc. (CTL)

The telecommunications space in the U.S. is crowded and highly competitive. As customers adapt to changes in offered products, traditional wire-line and long distance services no longer offer dependable revenue streams. Broadband and wireless are the primary revenue generators now. CenturyLink (NYSE:CTL) is a domestic telecommunications carrier. Verizon's (NYSE:VZ) network provides service in Canada, China, Hong Kong, Mexico and Europe. Today, we are looking at the ability of these companies to remain competitive and deliver value to shareholders in the near-term.

CenturyLink is a the third largest telecommunications company in the U.S. behind AT&T (NYSE:T) and Verizon. It is a broadband and local exchange carrier. It offers local and long distance voice and data communications as well as television and home security services. It offers Dish Network bundles to its customers and bundling with Verizon Wireless.

CenturyLink's common shares trade around $39, have a 52 week range of $43.49 and $31.16. It has a price earnings multiple of 36:52, earnings per share of $1.07 and a dividend yield of 7.40%. CenturyLink has total cash of $128 million and total debt of $21.84 billion. Its book value per share is $33.67.

CenturyLink purchased Savvis in April of 2011 for $2.5 billion, to enter the cloud computing market. The acquisition of Savvis gives CenturyLink the ability to expand its data storage services for companies around the world, extending its reach outside the U.S.. The company also acquired Qwest Communications in April of 2011 for $10.6 billion. The acquisition of Qwest combined the third and fourth largest land line telecommunications companies in the U.S.. CenturyLink took on $2 billion in debt to finance the acquisitions.

Fourth quarter 2011 results showed operating revenues of $4.65 billion compared to $1.72 billion in the fourth quarter of 2010. The Savvis acquisition contributed to the increase due to demand for data services and high speed internet. These gains were offset by losses in revenues from traditional access customers. Revenue decline was 3.2% year over year from $4.80 billion to $4.65 billion. Operating expenses increased from $1.22 billion in the fourth quarter of 2010 to $4.05 billion in the fourth quarter of 2011. This increase is also due to the costs associated with the Qwest and Savvis acquisitions. The company's net income in the fourth quarter was $109 million compared to $225 million in the fourth quarter 2010. Earnings per share were $0.18 as compared to $0.74 in the same period for the previous year. Higher operating costs and decline in legacy services offset the revenues gained from acquisitions. Net income for the full year 2011 was $573 million compared to $948 million for the full year 2010. The company increased its high speed internet subscribers with over 70,000 new customers compared to 57,000 in the same period of 2010. It also increased Prism TV subscribers by 16,000 with broadband adoption of over 90%. Of the new subscribers, over 50% are new CentryLink customers.

CenturyLink announced a debt offering of $1.4 billion in 10 year notes with a coupon of 5.8%. CenturyLink anticipates using the proceeds of the offering together with its existing revolving credit facility to fund the purchase of outstanding notes from its 2009 acquisition of privately-held Embarq Corporation notes, due in 2013 and 2016, of up to $2.05 billion.

CenturyLink's guidance for 2012 has operating revenue in the range of $18.2 to $18.4 billion and earnings per share of $2.25 to $2.45.

CenturyLink's closest competition is Verizon, with a market capitalization of $112.20 billion, yearly revenues of $110.88 billion, earnings per share of $0.85. Verizon's common stock trades at around $39, has a year high of $40.48 and a year low of $32.28. Price earnings ratio is 46:55 and it has earnings per share of $0.85. The dividend yield is 5.10%. Verizon has total cash of $13.95 billion and debt of $55.15 billion. The book value per share is $12.69.

Verizon's telecommunications business is active in six countries delivering broadband, wireless and wire line services to consumers, businesses government and wholesale customers. It also provides information and entertainment through its fiber optic network. Verizon acquired Terremark Worldwide in 2011 to increase its footprint in the global managed information technologies and cloud services market.

Verizon's fourth quarter results showed a 7.7% revenue growth from the same period in 2010. Earnings per share were $0.52, compared with $0.54 in the fourth quarter of 2010. On an annual basis, the company had earnings of $0.85 per share in 2011, compared with $0.90 in 2010. Cash flow from operations were $38.9 billion for the year and capital expenditures were $16.2 billion. The company returned $5.6 billion in quarterly dividends to shareholders during the year and approved a fifth consecutive year of dividend increases.

During 2012, Verizon announced that it will close or consolidate call centers in the U.S. but will provide relocation assistance or severance packages to the 3,000 workers who will lose their jobs. Verizon insists that this is not just a cost cutting measure but a reinvestment designed to "maximize the assets of the company and its real estate". Call centers subject to closings are in Washington, Houston, Texas and Michigan. Verizon will consolidate its call center operations in Folsom, California. In addition, Verizon will consolidate its operations in Folsom, California to its Rancho Cordova centre in California; a move affecting 325 employees who will also be offered positions in the company. It will consolidate its Internet call center into two locations in Ohio and Illinois. These consolidations and rationalizations are big news in an economy that is experiencing high unemployment numbers. At the very least, Verizon is not outsourcing these jobs to overseas markets.

Macroeconomic conditions affect the various telecom industries as they are vulnerable to the risks from changes in technology, government regulation, slow wireless growth in the U.S. and economic cycles. Subsidy payments to the telecommunications industry are an important source of access revenue. Reduction in these rates due to declining payment received from the Federal Universal Service Fund lead to declines in access revenues, which will lead to lower profits in 2012 and in the future.

Both these companies are vulnerable to the same issues of macroeconomics (which in turn lead to cuts in government spending for subsidies) and the highly competitive nature of the telecom industry. Both companies have made strategic acquisitions aimed at securing revenue streams from new areas to offset losses from traditional sources. Costs to enter the cloud computing, expansion into wireless markets, entertainment and cable spaces are prohibitively expensive to regional carriers. Verizon and CenturyLink have the capability to enter into the international space and compete at a higher level, but both have strapped on a lot of debt to secure their places in the global marketplace. Both companies have delivered revenue growth from these acquisitions, but the debt trailing as a result may knock either one out of the competition as the current debt loads will not allow either company to take on more debt to make new acquisitions.

High dividends are usually viewed as either a way to keep investors in when the stock price is underperforming or as a way to gauge the value of an investment. CenturyLink pays a high dividend, a function of the stock price which is trading near its book value. Verizon pays a healthy dividend and the stock trades at about 3.5 times book value. Despite delivering record revenues in the last quarter of 2011, Verizon's stock performance has underperformed and continues to do so. Both companies have secure dividends for the near term. I believe CenturyLink's acquisitions will have a positive effect to increase its price levels.

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