There are two views on CenturyLink’s (CTL) revenue and FCF (free cash flow).
Bull case: An inflection point on revenue will occur over the next few quarters, i.e., accelerating losses start to reverse. This will ensure long term FCF and EBITDA growth to cover the dividend and put the leverage ratio on a sustained downward trend.
Bear case: FCF will grow modestly over the short term but revenue will continue south for the long term. Eventually this will produce an inflection point for FCF. FCF will start to trend down at some point making the dividend unsustainable. The dividend will be cut or eliminated. The long hoped for inflection point for revenue is not in sight. I heard a term the other day that CTL’s revenue is like a melting ice cube which would fit the bear case.
What we know is FCF will improve in the short term due to cost cutting, synergies and the culling of unprofitable revenue, however it’s not about the short-term health of the company but the long-term health and the question always comes back to revenue. I see revenue visibility as three pillars at this point.
The company should know the amount of revenue they plan to exit as we are well into integration. Legacy declines have been occurring for some time so it’s the easiest of the three to project. Where visibility is lacking and driving price declines is number 3. Why? If known they should have an idea of when growth in profitable revenue will start to slow revenue losses.
Jeff Storey was asked when profitable revenue will overtake declining revenue at the Citi Global TMT Conference on January 8, 2019 and said he did not know but told the interviewer that investors should focus on FCF per share growth. The interviewer asked the wrong question. The question to ask is when a revenue inflection point will occur, i.e. when will revenue declines start to slow? My model (at the end of this article) projects overall revenue declines for years so his answer was expected given revenue declines going forward.
Guggenheim came out for the bear case citing, “CTL's poor positioning in the changing telecom environment and doesn't think the current dividend is sustainable.”
Longleaf Partners Fund sees CTL trading at a deep discount putting them well into the bull case.
Which is it? I wrote in my last article “revenue was the elephant in the room and ignoring it is not an option”.
We can do an in-depth revenue projection supporting either case but the person who holds the key is Jeff Storey. CTL will announce full year results on February 13. I believe Q4 revenue will continue its march south, 2019 FCF guidance will easily cover the dividend with $1B+ left over to pay down debt and/or other priorities but none of this will matter until revenue is put more in focus and that focus is not when profitable revenue overtakes declining revenue but when the rate of loss starts to slow. Jeff Storey hinted they will start to see some growth at the Citi conference. He said watch our Enterprise revenue especially the high-end Enterprise which appears to have fallen on deaf ears. I see the inflection point occurring this year. Unfortunately, until management reinforces this view expect volatility in the stock price to continue.
The stock may rally on FCF and EBITDA guidance and if the company commits to the dividend, but if the revenue question remains open, the tug of war between the bull and bear case will resume. The bears appear to be winning at this point.
Stock movements up to February 13 reflect bets placed on guidance, especially on revenue and the level of support for the dividend. We have Guggenheim at one end of the spectrum and Longleaf at the other. I lean closer to the Longleaf view. Views seem all over the map. Here are some of the latest analyst views based on my research:
Management’s comments to date tend to lean toward the bull case but it’s clear the market does not believe their rhetoric. Will management address the elephant in the room? Stay tuned. My view remains as follows:
Yellow highlight is actual results (Source: my analysis)
You can also go to this interactive model and generate what is required for a bull or bear case.
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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.