CenturyLink Ready To Move $3 Higher

Jun.13.12 | About: CenturyLink, Inc. (CTL)

CenturyLink (NYSE:CTL), according to the online buzz, will soon offer bonded VDSL2 with speeds of up to 100 Mbps (an official announcement regarding this development has yet to be made, but there are bundle prices with the new high speeds listed up on the company website.) This top speed is up from a previous high of 40 Mbps. It seems the new technology is still in the testing stages, with pair bonding tests currently being carried out in the Denver area, but rumors suggest we can expect the services to be offered more widely later this year.

News that CenturyLink is making improvements to its current communications service will come as a fresh of breath air to investors. The company, along with other similar rural-based organizations, has struggled to keep up with the new hi-speed generation of telecommunications. It did seem for a while it would be at risk of being taken over by a larger company such as AT&T (NYSE:T), a weakness that saw its share price steadily decline, but after a number of acquisitions, the local firm has managed to stay afloat. This speed boost will see CenturyLink compete alongside larger telecommunications suppliers - although the company does still have a long way to go.

Many CenturyLink customers have reported that they are receiving regular speeds of only around 3 Mbps. That said, this issue is one affecting customers of the majority of telecommunications providers; top speeds are often not indicative of average speeds. This is becoming a problem with the way in which companies advertise, and there are talks that soon average rather than top speeds only will be allowed to be displayed. But as long as CenturyLink rolls out its new high quality service with consistency, this won't be a problem, and could even put it at an advantage if advertising rules do change later in the game.

CenturyLink aims to use an improved broadband service to attract new wireline customers, and increase revenue gained from its existing market share. Whilst this is a possibility - over 70,000 new households had signed up to CenturyLink's new hi-speed data service Prism by the end of last year, with half of those subscribed in the final quarter as entirely new CenturyLink customers - it won't be as easy as it sounds. The company faces stiff competition from rival telecommunications suppliers AT&T and Verizon (NYSE:VZ), which both currently dominate a larger proportion of the US market than CenturyLink.

AT&T and Verizon both offer wireless services in their communications packages, which CenturyLink has as yet failed to do. Given that the majority of the population is now familiar with the advantages of wireless technology, this puts the company at a significant disadvantage. There is still scope in targeting local customers looking for only basic services - proof if this can be seen in regional telecommunication companies FairPoint Communications (NASDAQ:FRP) and Frontier Communications (NYSE:FTR), which both operate on a smaller scale to that of CenturyLink. These companies have encouraged customers away from major suppliers by offering great value for money. CenturyLink could do the same, but would doubtlessly benefit from improving its current technology.

Last year CenturyLink made two major company acquisitions - Qwest Communications in April, followed by Savvis in July - and how successfully these three organizations merge into one will largely determine the company's future. The acquisition of Savvis brought with it the development of cloud-based computing, an area in which CenturyLink is now directing much of its innovation programs.

Managers hope that picking up customers in this area will make up for the loss of traditional wireline customers to new wireless technology. But the company faces huge competition in the cloud storage market, with popular solutions offered by technology giants Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). Nevertheless, the emergence of a new market with demand for cloud computing is one CenturyLink could aim to penetrate at a local level, focusing on small enterprises attracted by the low cost of the data storage option.

CenturyLink's recent acquisitions have helped in reducing declining numbers of wireline customers (annually, it is now losing only around 7% of its customer base). It hopes that by minimizing these customer losses, it can use revenue generated to develop broadband services further - and this seems to be exactly the move it is making by increasing top broadband speeds to 100 Mbps.

I think a transition to smooth and reliable broadband services is exactly what the company needs - although perhaps its next move could be investigating the possibilities of wireless communications, as this is where the market is heading. Higher broadband speeds may be a step in the right direction, but they are still a step behind the company's bigger competitors. By retaining a localized market, CenturyLink should still be able to catch up with its current strategy before it is too late. The success of this ideology does depend widely on cash flow balances, in terms of taking positive revenue gained in wireline services and pumping it into broadband development. Personally, I do think CenturyLink has the direction and strength in senior management to see it though.

Although CenturyLink's share price is strong, first quarter profits for 2012 have shown a decline in revenue of just over 5%, mainly attributed to the declining interest for one of the company's flagship products: voice technology. Despite this, the company is still worth considering for investment as it has a clear strategy. Careful cash flow measures and cost reductions will be crucial in retaining direction, but company goals remain within reach. I think the stock will climb up toward the $40 level by late 2012.

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