CenturyLink (CTL), which is the fourth largest landline operator in the US, reported adjusted earnings per share for the first quarter of 2012 of $.68 per share, which was comfortably ahead of consensus estimates of $.59 per share.
However, adjusted earnings declined by just under 13% from $.78 a share for the same quarter in the previous year because of the increase in operating costs, as well as decline in revenues from legacy voice services. Even the adjusted earnings per share excludes the impact of special accounting items, such as non-cash amortization of intangible assets. However, it should be noted that revenues on a year-on-year basis were 'doomed' by over 170% to $4.6 billion, which was slightly ahead of the consensus estimate of $4.6 billion.
The revenues of the Markets Group fell by around 4% year-over-year to $2.2 billion; the slowdown in the legacy business was the principal cause. Business Market Group revenues at $917 million fell a little over 1% from the same quarter of the previous year, affected by declines in legacy revenues and data integration services. Revenues at the Wholesale Markets Group were down a little over 4% on a year-on-year basis to $957 million, as subscribers replaced their fixed line services with wireless services and VOIP. On the back of strong generation, Savvis reported revenues of $266 million, up almost 4% on a year-on-year basis. As at the end of the first quarter, total access lines numbered 14.4 million, compared to 14.6 million in the quarter one year ago; 89,000 high-speed Internet connections added during the quarter brought the total up to 5.64 million (up over 4%).
CenturyLink ended the first quarter with $1.5 billion in cash and equivalents against $128 million at the end of the previous fiscal year. Long-term debt showed a slight increase from $20.6 billion to $20.8 billion. Operating cash flow was $1.6 billion in the quarter compared to $670 million in the previous year. This was largely due to the acquisition of Qwest.
For the second quarter of 2012, CenturyLink projects revenues at around $4.55 billion and earnings per share in the range of $.59 per share to $.64 per share. Operating cash flow is expected to be in excess of $1.8 billion. For 2012, revenues are expected to be in excess of $18 billion, with earnings per share between $2.35 a share and $5.15 a share.
It is obvious that the integration of its former rival Qwest is ahead of time and budget and this will help both the short-term and the long-term prospects of the company. Solid results and expectations are the ones above should normally have increased the stock price noticeably, but this has not happened. My own feeling is that the trouble is that showed up in the earnings announcement of rival Windstream (WIN) may have been taken by investors to be a sign of weakness reaching and fixed wire telecom companies. This may have been exacerbated by the weak results posted by Frontier Communications (FTR) a few days earlier.
Ironically, despite its size and listing in the Fortune 500 and the S&P 500, CenturyLink is nowhere nearly as well known as its larger peers AT&T (T) and Verizon (VZ). In fact, the hefty 7.5% dividend yield is larger than the 5.4% paid by the former and the 5% by the latter. The coverage for the dividend indicates that it can be comfortably maintained for the foreseeable future. CenturyLink has been clever in devising its strategy to cope with the decline in the fixed line business but it may surprise you to learn that it does not have a wireless network and does not intend to establish one. It does not consider the wireless business as a core business, but focuses on services based on high-speed Internet and fiber-based television services. Operations have recently been reorganized by reducing five business divisions to three in the expectation of reduced operating costs and enhanced cross selling opportunities.
Looking to the future, some of the present moves made by the company seemed to have established a solid platform for future growth. It has recently acquired Savvis for $2.5 billion as it moves into the promising cloud computing market, and Cognizant, which is a leading provider of IT consultancy and services, has selected Savvis to provide cloud computing solutions to its customers. Cognizant is a highly respected provider of services both in the information technology and telecommunications industries and the choice represents a major vote of confidence in CenturyLink.
As it is, the dividend yield of 7.5% alone makes this an extremely attractive investment, especially if you are an income investor and not satisfied with the 2% or so you would get from treasuries. If the results continue to be better than expected, you can also expect a growth in the dividend yield. As if the dividend yield was not superior, the current multiple at which the stock quotes makes it cheaper than the two giant rivals AT&T and Verizon. This would make it an extremely attractive investment on fundamentals alone. The very substantial growth prospects in the future that are going to be generated from the acquisition strategy and the clear focus on its core business add to the attraction of the investment.
In my opinion, the investment-grade credit rating of the company and its pledge to reduce long-term debt to preserve this rating is a clear sign that it is serious about preserving its access to cheap capital. Despite the limited nature of the rural telecom market, it does have a presence in what I regard as the important markets of Denver, Phoenix, Seattle, Portland and Las Vegas - all of which have seen strong growth in population and are likely to do so in the future. There is only a very limited downside on this investment and I would have no hesitation in recommending a buy. If you already have an existing investment to which you do not want to add for your own reasons, continue to hold your existing investment.