CenturyLink: Bearishness Intensifies

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About: CenturyLink, Inc. (CTL)
by: Business Quant
Summary

Analysts have lowered their FY19, FY20 and FY21 revenue forecasts for CenturyLink over the recent months.

The company's subscriber base erosion and decline in voice revenue may have been the major drivers behind these downward revisions.

I believe CenturyLink shares can fall further.

Shares of CenturyLink (CTL) are down by about 50% from their 52-week highs, but the downtrend may still continue going forward. Latest data suggests that analysts are growing bearish on the telecom firm and its growth prospects. This dynamic, in my opinion, stands to weaken investors’ confidence, encourage shorts and it corroborates the thesis that CenturyLink and its shareholders could continue to face challenging times ahead.

(Source: Bigstockphoto, Image license purchased by author)

The Data

Let me start by saying that CenturyLink has been a poor stock to own over the recent quarters. Its merger with Level 3 Communications was previously thought to be a booster for the company, but things clearly did not materialize that way. CenturyLink has been consistently losing broadband subscribers and its shares have trended down since past August. Unfortunately, for long-side investors at least, this trend could continue going forward as well.

The chart attached below reveals a rather gloomy picture. Analysts have collectively lowered their revenue estimates for CenturyLink’s FY19, FY20 and FY21 over the recent months. This goes to suggest that these analysts have grown bearish on the telecom company, more bearish than they were till about a few months ago. Note that analysts are projecting CenturyLink's revenues to decline by about 2.3% in FY20 and FY21 each, so that’s another factor that readers and investors should keep in mind when evaluating the company.

Chart Data by YCharts

If CenturyLink's growth prospects were starting to improve, the analyst consensus would have trended up uniformly across all time frames. But the fact that analysts have lowered their FY19, FY20 and FY21 revenue projections for CenturyLink only goes to suggest that the telecom firm is poised to face challenging times ahead or at least its prospects are looking less bright now compared to what they were looking like till a few months ago.

So, I view this trend of lowered revisions as a leading bearish indicator for the company and its shares. But this dynamic begs the question: Why are analysts lowering their revenue forecasts for CenturyLink in the first place?

Downward Trajectory

There are majorly three problems that are having a rather profound impact on CenturyLink’s operations, financials and their board’s decision making. First, the company is sitting on a debt pile of over $36 billion. This figure is enormous considering the fact that the company generated about $9.02 billion in operating cash flows in FY18 while its interest burden stood at $2.11 billion over the period. In fact, its leverage levels are on the higher end when compared to some of the other U.S-based telecom companies.

(Chart by author, Data from Ycharts and CTL's EBITDA sourced from SA)

Secondly, the business hasn’t been growing of late and some of its key segments are actually in a state of decline. So, we can’t simply assume that CenturyLink would pare down its debt over time without altering its capital allocation strategy. The chart below highlights that the company’s voice services are registering a steady decline in sales over the recent quarters – a trend which is being seen in other wireline telecom firms as well. This fuels uncertainty regarding the growth prospects for CenturyLink and encourages shareholders to ask what’s in it for them, while the business stagnates.

(Source: BusinessQuant.com)

The chart above may not mean much in isolation as it doesn't highlight the revenue contribution of each of CenturyLink's service verticals. So, the chart attached below should put things in perspective. The decline in its IP and data services, along with its voice revenues, stand to drag CenturyLink's overall sales lower as both segments are material sales contributors.

But overall, I believe there's the risk that CenturyLink could be re-rated downwards, and subsequently, its shares could fall further if it doesn’t start showing signs of growth anytime soon.

Third, CenturyLink has lost a considerable amount of consumer broadband subscribers over the past few years, making it the second worst performer in the industry, with Frontier Communications (NASDAQ:FTR) making it to the bottom of the list. This subscriber base erosion needs to be contained, otherwise it would result in the continued decline of CenturyLink’s revenues in the coming years as well. This, in my opinion, is one of the largest contributors behind analysts lowering their revenue forecasts for the company’s FY19, FY20 and FY21.

(Source: BusinessQuant.com)

Sure, cost cutting measures and better utilization of cash can make the company more efficient and these measures might as well mitigate the impact of subscriber base erosion to a certain extent. But a shrinking top-line, one that a company’s management is unable to control, is a red flag for a broad swath of growth and income-seeking investors. Hence, I believe that CenturyLink’s subscriber base erosion is a discouraging sign for existing investors and anyone looking to enter the telecom space.

CenturyLink’s problems aren’t very different from other beleaguered telecom firms such as Frontier Communications. It needs to aggressively invest into fiber footprint to bolster its competitiveness, stabilize its subscriber base losses and generate extra revenue to offset the decline in its voice revenue. But laying down fiber is a capital-intensive process with actual costs varying based on how far the properties are from nearby distribution points and also depending on how much groundwork is needed.

Besides, CenturyLink’s management slashed its dividends in a rather abrupt manner earlier this year. While dividends don’t have a direct impact on a company’s revenue or earnings per se, the abrupt cut did fuel uncertainty relating the company’s health and its prospects in various investing forums. I suspect this development may have also encouraged analysts to lower their revenue forecasts for CenturyLink of late.

Takeaway

The key takeaway here is that analysts are lowering their revenue projections for CenturyLink which may be a red flag for long-side income and growth-seeking investors. It’s a sign that the company and its shareholders could face challenging times ahead. If the company was posting growth across different segments, then I may have drawn a different conclusion. But in light of growing bearishness relating to the telecom firm and its sluggish segment-level performance, I recommend readers and investors avoid the stock for now as it can fall further over the coming months. Good Luck!

Author’s Note: I’ll be writing another report on CenturyLink later this month, you can stay updated by clicking the “Follow” button at the top of this page. Thanks

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