What CenturyLink Shareholders Want From Level 3 Management For Xmas

Dec. 26, 2017 9:20 AM ETLumen Technologies, Inc. (LUMN), LVLT49 Comments2 Likes
Income Clock profile picture
Income Clock
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Summary

  • A whimsical, yet fact-filled letter Xmas wish from a CTL shareholder to Mr. Storey Claus.
  • A strategy that would make all parties happy is suggested.
  • If you agree with the suggestion, please post it to social media.

Dear Mr. Storey Claus,

As a CenturyLink (CTL) shareholder I'm very relieved that you are now in charge of day to day operations. LVLT 5 year chart

I've seen the improvements that you've made at Level 3 (NASDAQ:LVLT) since taking over in April of 2013 and watched as the stock price more than doubled over the next two years. However, not everyone is watching as carefully as I am. I spoke on the phone with one pension fund managers just a couple of weeks ago. When I mentioned your management's assurances about the dividend, and my math projecting that it would not be cut, his response was "Oh, really?" He then conceded that he had not looked at the company in almost a year, let alone projected the combined business.

Not everybody realizes that Level 3 is more taking over CenturyLink than the other way around. All people know is that it has been a tough time for telephone companies. Sure, we heard that CenturyLink's independent commission found billing errors but no fraud, and we understand that the reality is that all phone U.S. companies seem to have problems like this. I know that I've wasted hours on the phone to get corrections from one of the other major carriers for being mis-billed for the third month in a row!

Not everybody even understands that, with less than one quarter of its revenue coming from consumers, this new company is more of a network provider than a telephone company. Sure, you and I understand that companies moving to the cloud is likely to be a business driver going forward. Your accountants may even have pointed out that cloud migration is likely to be accelerated by the changes to the tax code which reduce the benefits of depreciation and interest expense to companies that were maintaining their own infrastructure. As a programmer, what I know is that the initial data transfer in those migrations has been a tractor trailer-sized problem, and that CenturyLink's working relationship with Amazon (AMZN) gives both companies an inside track to new customers.

I also see that Verizon (VZ) just closed the purchase of 1200 miles of fiber from Wide Open West (WOW) for $225M. That equates to $0.1875M per mile. Valuing CenturyLink's 450K+ miles of global fiber that way would come to $84.375b or over four and a half times the company's current market cap. That's not a realistic way to value a network of that scale, or the company, but I think it does speak to the competitive market position, and thus moat. Furthermore, Sprint (S) owner Softbank has started to get friendly with Vodafone (VOD) on enterprise services, and Dish's (DISH) Charlie Ergen has abdicated his CEO role to focus on wireless. There are profound implications here for a much-needed wave of new competition. With Net Neutrality gone, change is in the air and I think the winds are finally at CenturyLink's back.

I know you and your management team are doing what you can to inspire confidence and clue the analysts in. The recent wave of open market insider buys are much appreciated:

Insider Name Title Bought Price Resultant Ownership
Jeff Storey COO 71,000 $14.30 2,498,668
Helena Martha Director 7,000 $14.28 25,991
Michael Roberts Director 7,000 $14.58 40,512
Harvey Perry Chairman 7,500 $14.32 92,036
Bruce Hanks Vice Chairman 10,000 $14.41 58,722
Michael Glenn Director 25,000 $14.25 32,143
Steven Clontz Director 25.000 $14.25 126,019
Glen Post CEO 50,000 $14.17 1,558,139
Kevin Chilton Director 1,000 $14.47 40,732
Steven Clontz Director 35,500 $15.70 171,519
Virginia Boulet Director 5,095 $15.48 43,140

This is one of the factors that has helped CTL shares to rebound from recent lows, and it's a start. Again, though, you've got to recognize what you're dealing with out there. Investors are justifiably cynical after years of being lied to in the broader market by both management and analysts. Not a one in the latter community has even said a word about the introduction of weekly CTL options which started on December 22nd. Yet my own studies indicate that the increased hedging activity has a positive affect on the underlying. Instead, I listened to these same analysts argue over things as mundane as the relative efficacy of stock buybacks on the most recent conference call.

So, Mr. Storey Claus, I'm going to suggest something you can do to that would get investors to really believe: When you take over as CEO in January of 2019, you could start paying executive management entirely in CTL shares. To offset the dilution, you could also buyback shares in equal measure, thereby quieting some of the sillier analyst buyback demands, while preserving value to those of us with a more fundamental and long-term mindset. I can't claim to speak for everyone, but I feel certain this would be a convincing move that would be applauded by analysts and investors alike. I know it's a big change to ask for, but Xmas is a time for wishing, after all.

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Disclosure: I am/we are long CTL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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