CenturyLink's (CTL) share price has corrected significantly during the coronavirus sell-off in the markets. The company has multiple growth drivers in place, which will drive its share price higher again. The company's Ethernet based networking services, Internet Protocol services, unlit optical fiber technology, and IT and Managed Services are its primary growth drivers. Long-term growth-oriented investors can buy CenturyLink's shares now and during pullbacks to maximize their gain.
CenturyLink is a telecommunications company primarily engaged in offering a wide array of integrated services, such as VPN Data Network, Ethernet, Internet Protocol ("IP"), Content Delivery, Dark Fiber, Colocation and Data Center Services, Voice Over IP ("VOIP"), and IT and Managed Services. The company has a terrestrial and subsea fiber optic long-haul network spread across the world that is connected to the metropolitan fiber networks that it operates.
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Growth Drivers
Ethernet Technology
CenturyLink offers a wide array of networking services built on Ethernet technology. This is one of the company's main growth drivers. Ethernet based networking services include point-to-point and multi-point equipment configurations. These equipment configurations help data transmissions across metropolitan area networks and wide area networks. The carrier ethernet market is growing at a healthy rate. Ethernet based networking services currently account for almost 80% of the global bandwidth connectivity services market.
Internet Protocol
CenturyLink's Internet Protocol service is another growth driver, which provides its customers an extensive array of industry-leading features, capabilities, and interface requirements. It offers global internet access over a secure network with connectivity in more than 60 countries. The network covers North America, Europe, Latin America and Asia Pacific.
Dark Fiber
The company's unlit optical fiber technology is another growth driver. Unlit optical fiber, which is an unused optical fiber that has been laid, is also known as dark fiber. This high-bandwidth technology helps large enterprises build highly secure networks. The company helps enterprises design a custom network, and assist enterprises with deployment and implementation of the network. According to a report:
Dark fiber networks market is set to reach US$ 11.57 Bn by 2026, growing with a double digit CAGR throughout the forecast period from 2018 to 2026.
The dark fiber networks market is a high growth market, which will drive CenturyLink's long-term revenue growth.
IT and Managed Services
The company's IT and Managed Services offer growth opportunities to the company. The company provides technology solutions to its customers and also manages those solutions for them. These services include network, hosting, cloud and IT services which are delivered on an ongoing basis. Various small and medium enterprises need these services and these services have good demand in the market. These services will significantly boost CenturyLink's overall revenue growth in the long-term.
Competition
CenturyLink belongs to a highly competitive and rapidly evolving industry. Technological advancements and regulatory and legislative changes have created new opportunities for new communications service providers, which have increased competitive pressures on CenturyLink. The company's competitors include AT&T (T), Verizon (VZ), Comcast (CMCSA), NTT (OTCPK:NTTYY) and Orange S.A. (ORAN). CenturyLink offers top quality services in every segment. It competes on the basis of technologically advanced services, reliability of its network, high data transmission speeds, price and customer service.
First Quarter 2020 Results
CenturyLink's first quarter 2020 total revenue came in at $5.228 billion, compared to $5.427 billion in the year ago period. The company's first quarter 2020 diluted earnings per share came in at $0.37, compared to $0.34 in the year ago period, excluding the aggregate effects of integration and transformation costs and special items of $85 million and $6.525 billion, respectively. The company's free cash flow was $407 million in the first quarter 2020, excluding integration and transformation costs and special items, compared to $315 million in the year ago period.
The company reported disappointing revenue growth, but encouraging earnings per share and free cash flow growth. Overall, this was an impressive result amid a challenging macro backdrop. The company withdrew its full-year 2020 guidance for EBITDA, free cash flow and capital expenditures issued in February, due to the impact of the coronavirus pandemic and related economic uncertainty. I believe the company's full-year 2020 top-line and bottom-line growth will remain in the positive territory, because people from all walks of the society are embracing digital interactions and online services during this crisis period, which implies the demand for CenturyLink's services will rise.
Valuation
CenturyLink's peer group includes AT&T, Verizon, Comcast and Orange. CenturyLink's non-GAAP forward PE multiple is 7.77x, compared to AT&T's 9.54x, Verizon's 11.43x, Comcast's 16.92x and Orange's 9.85x. CenturyLink's trailing 12-month price to sales multiple is 0.48x, compared to AT&T's 1.25x, Verizon's 1.71x, Comcast's 1.66x and Orange's 0.63x. CenturyLink's trailing 12-month price to cash flow multiple is 1.61x, compared to AT&T's 4.72x, Verizon's 5.99x, Comcast's 7.43x and Orange's 2.60x.
CenturyLink is attractively valued compared to its peers. It has a weak balance sheet consisting of $1.56 billion of cash and $36.34 billion of debt. The company's net leverage is 3.97x, which is on the higher side. However, the company has plenty of growth drivers, as mentioned above, which will drive its long-term revenue growth higher. The company is attractively valued because of its indebtedness. I believe the company's growth drivers are strong enough to generate significant free cash flow in the coming years, and the company will be able to gradually decrease its debt load. From this point of view, the company's stock is a good "buy" now and during pullbacks for the long-term.
In the last five years, the company's revenue has grown at a CAGR of 4.40%. I believe revenue will continue to grow in mid-single digits in the next five years. The company's trailing 12-month revenue is $22,202 million. Assuming revenue will grow at a CAGR of 5% in the next five years, its mid-2025 revenue will be $28,342 million or $25.77 per share. In the last three years, the company's shares have traded between the price to sales multiples of 0.44x and 1x. If a price to sales multiple of 1x is applied on the company's mid-2025 revenue per share, its mid-2025 share price will be $25.77.
Key Risk
The company's wireline product offerings are increasingly facing intense competition from wireless and broadband communications providers, as a result of which the number of the company's wireline voice customers has significantly declined. In addition, competition from cable companies and cloud companies has resulted in declining revenue for the company. For competing effectively in the market, CenturyLink must develop, test and introduce new products and services in a timely and cost-effective manner. However, this is not always possible in the communications industry due to network limitations, support system limitations, inadequate digitization or automation, and limited capital. If the company cannot keep ahead of the competition, its revenue growth and operating results would be negatively impacted.
Conclusion
CenturyLink's first quarter 2020 results were impressive despite a weak macro situation. I expect the company's full-year 2020 results will be okay because demand for its products and services will remain healthy in the current scenario. From 2021 onwards the company's results will show meaningful improvement since global economy will start to recover from 2021. CenturyLink is a good business to own for the long-term.
